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Expert Analysis: Bullish Sentiment Is Fading Fast

Oil

- Over the last three weeks strong WTI spreads served as a key reminder of bullish fundamental expectations as flat price sold off sharply. This week’s collapse in prompt and deferred WTI spreads marks an important turning point in market sentiment as bullish enthusiasm and confidence in the OPEC-lead rebalance narrative fades. We’re also noticing increasingly negative data responses with last week’s extremely bullish report being met with a tepid rally while this Wednesday’s boorish data lead to rush for the exits-level two-handed spread selling.

- On a more positive note we expect OPEC to continue to be able to manage downside risk in the mid/low $40s through bullish headline risk. Today’s leading item on Reuters’ commodities page read After oil drop, some OPEC delegates question if supply cut deal enough and we think the cartel has more tricks up their collective sleeve to bully speculative short positions in weak market environments.

- U.S. crude imports remain a key bearish input for U.S. supplies and Bloomberg Tanker Tracker is expecting 2-month high in imports in the coming weeks. PADD I crude imports are +39 percent y/y over the last month while PADD II imports are +19 percent as Canadian output jumped by 250k bpd y/y YTD through April.

- Away from the bright lights of U.S. fundamentals certain European and Asian product hubs are quietly tightening. Singapore distillates are -19 percent y/y, ARA gasoil stocks are lower by 11 percent y/y and ARA fuel oil stocks are -29 percent y/y.

- In geopolitics, the Saudi-led coalition cutting ties with Qatar added at least a small amount of risk to the market but it’s unclear in which direction. Iranian and Turkish troop movements to support Qatar obviously won’t sow supply security but it also seems unlikely to catalyze a breakdown on the current OPEC deal given that the agreement was reached - and has been adhered to- when massive division within the group on a variety of geopolitical concerns already existed. Abu Dhabi had eased co-loading restrictions on tankers heading to and from Qatar by Wednesday. RBC commented (via Bloomberg) that they see shipping risks surrounding Qatar as ‘overblown’ while Citi commented that the impact of the dispute is likely to be small. Related: Is $50 Oil Still Realistic?

- Away from the oil market it’s also important to note the action in bond markets as global growth concerns have accelerated. This week the World Bank cut its 2016 global growth forecast from 2.9 percent to 2.4 percent and Chinese exports for May fell more than 4 percent y/y. Central bankers in the U.S. and Eurozone also struck somewhat dovish tones recently (the ECB cut its inflation forecast this week) which helped drive the U.S. 10yr below 2.15 percent. As for crude, we continue to be troubled by the lack of distillate and gasoline demand growth in developed markets and feel that a meaningful bullish move for oil would require some sort of rejuvenation in the global reflation narrative.

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WTI spreads take a bath despite another large Cushing draw

WTI spreads got clobbered this week with help from a 3.3m bbl U.S. supply build which wrong-footed a large percentage of traders who were riding Cushing draws to substantial gains. In the front of the curve wti q17/z17 fell from -54 to a low of -1.01 while wti z7/z8 dropped from +0.20 to a low of -1.16. Midland-WTI also revealed a weakening Texas market falling to -.80 for a 65-cemt drop over the last two weeks. CSO deals were mostly bearish this week and drove a healthy put-skew with the 30-cent out of the money put in u/v to a value of 4 cents while the 30-cent out of the money call was worth 2.5 cents

U.S. crude production broke trend last week falling 24k bpd to 9.32m bpd. This seems likely to be a brief setback for U.S. output as the EIA continues to see 2017 supply of 9.3m bpd (implying +9.45m bpd for the balance of 2017) and 2018 production of 10m bpd. As for hedging, the gross short position held by merchants and producers in NYMEX WTI + ICE Brent fell to 1.98m contracts representing an 8 percent decline from its recent peak in March. The U.S. oil rig count maintained its climb higher moving to 733 on its 20th straight w/w increase.

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Never mind Libya, brent spreads get smoked

Brent spreads also feel victim to mass selling this week despite a sharp drop in Libyan production to 625k bpd due to labor strikes at Sharara (down from +800k bpd last week.) On the bearish side Shell’s lifting of force majeure at Forcados spread concerns that the WAF backlog could worsen while Chinese buying of cargoes in the Atlantic was notably absent. In the end, bearish sentiment clearly took control of spreads pushing brent q7/z7 to a 40-cent weekly loss to a low of -1.34 while brent z7/z7 fell from -6 cents to -1.49.

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Options premiums shift higher on flat price weakness

WTI options were more expensive across the skew this week following Wednesday’s aggressive flat price correction to a 1-month low. As of Thursday afternoon, WTI U17 50 delta options priced at 30.6 percent vol for a 2.5 vol w/w increase. WTI U17 25 puts traded at a 3-vol premium to 25 delta calls which was a more flat skew by ½ of a vol w/w. Realized volatility (20-day) was marked near 32 percent which should continue to support implied vols in the near term. Away from the oil market the VIX traded in a 9.5/11.0 range while EUR/USD vol sank to 6.6 percent for a 3-month low.

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Fund Positioning Still Unremarkable

Hedge funds persisted as net buyers of NYMEX WTI and ICE Brent contracts in the week ended May 30th for the fourth straight week due to modest short covering which outweighed a small quantity of length covering. Combined net length between NYMEX WTI and ICE Brent contracts currently stands at 556k contracts which is 9 percent above its 2yr average. Gross short positions have been cut by 34 percent over the last two weeks and at 214k (NYMEX WTI + ICE BRENT) are 20 percent above their 2yr average.

On the product side funds were net buyers of NYMEX RBOB and NYMEX Heating oil last week bring their net length positions to 4k and 17k, respectively. USO flows were also unusually dull last week and the fund reported a net buy of $8 million.

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More Heartbreaking EIA Data for Bulls

- Wednesday’s EIA report was disappointing across the board and reaffirmed concerns for bulls that U.S. stats need to be unanimously bullish in order to support a market with increasingly negative sentiment

- Supply data for crude oil, gasoline and distillate fuel was significantly more bearish than expected with help from weak refiner demand and negative import and export trends

- On the bright side, U.S. production declined by 24k bpd w/w but analysts still expect to see strong production gains from the U.S. through at least 2018 Related: The Next Big U.S. Shale Play

U.S. crude supplies added 3.3m bbls last week which was a highly abnormal print for June driven by increased imports, falling exports and a sharp decline in refiner demand. Overall crude inventories are higher y/y by 2 percent while PADD II stocks are +6 percent y/y, PADD III stocks are +2 percent y/y and Cushing stocks declined by 1.4m bbls w/w to 63.3m bbls. PADD I and PADD II imports spiked by 524k bpd and 382k bpd, respectively which was compounded by a 746k bpd decline in exports. U.S. crude production fell 24k bpd to 9.32m bpd. Overall U.S. crude imports are +9 percent y/y despite recent Saudi efforts to cut U.S. shipments.

U.S. refiner inputs registered a sharp w/w drop from 17.5m bpd to 17.22m bpd but are still higher y/y by 6 percent over the last four weeks. PADD I demand is currently lower y/y by 5 percent while PADDs II and III are both higher y/y by 8 percent. U.S. refinery utilization is currently 94.1 percent which is higher y/y by 3.8 percent. Crack margins continued to decline this week due to strong inputs in the U.S. and abroad with the WTI 321 crack falling to $16/bbl while in Europe the gasoil/brent crack dopped to $9/bbl. In the USGC the LLS 321 crack traded $9.40/bbl.

U.S. gasoline inventories suffered a 3.3m bbl w/w build last week which was especially unusual given the sharp drop in refiner inputs. Overall gasoline stocks are flat y/y and are +1 percent higher in PADD I, 3 percent higher in PADD II and flat y/y in PADD III. Gasoline imports increased slightly w/w to 787k bpd and are -3 percent y/y over the last month while exports fell to 555k bpd and are +48 percent y/y. Domestic gasoline demand printed 9.3m bpd for a massive 500k bpd w/w decline. Domestic gasoline consumption is lower by 2.6 percent y/y over the last four weeks.

Distillate inventories also increased by a surprising 4.4m bbls w/w and are now flat y/y after trending bullishly for most of the last two months. PADD IB distillate stocks added 309k bbls w/w and are higher y/y by 4.9 percent over the last month while PADD II stocks are +8 percent y/y and PADD III stocks are -5 percent. U.S. distillate production printed 5.3m bpd and is higher y/y by 9 percent driven mostly by a 17 percent y/y increase in PADD II. As for demand, distillate exports printed 1.3m bpd for a y/y improvement of 10 percent while domestic consumption fell 500k bpd to 3.5m bpd.

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Bonus Charts

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By SCS OTC Corp

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  • Al on June 10 2017 said:
    Analysts should research what is happening near the Syria/Iraq border and the upcoming hurricane season before they throw in the towel...

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