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Expert Analysis: The OPEC Cuts May Be Working

Rigs

- WTI traded to a 3.5 month low on Tuesday at $47.09 after OPEC members shook production cut deal confidence for a second straight week. Saudi Arabia contributed to bearish concerns by reporting February production of 10.01m bpd for a 263k bpd m/m increase (secondary source estimate for Feb was less than 9.8m bpd) while Iraq released a goal of producing 5m bpd by the end of 2017.

- We continue to have a short term positive view of sub $50 WTI choosing to focus on IEA estimates that OPEC is 90 percent compliant with their 1.2m bpd production cut goal (other analysts see +100 percent compliance) rather than the mixed rhetoric from members. To help their effort Bloomberg reported that non-members cut exports by 240k bpd in February. In terms of rhetoric, Saudi Arabia also worked to walk back some of the concerns they created (and perhaps intimidate short positions) in the last two weeks stating that February’s production jump was an effort to reload domestic tanks and also that they will ‘do what it takes to bring the industry back to a healthy situation.’ As for exempt members, disruptions in Nigeria and Libya continue to support prices with output limited to 1.4m bpd and 620k bpd, respectively.

- This week’s EIA data showed the leanest U.S. crude imports since September 2016 (signaling OPEC cuts in action) which helped lead a seasonally abnormal inventory draw. U.S. gasoline and distillate inventories both enjoyed large draws and fell into y/y deficits. On a more bearish note U.S. demand remains problematic with U.S. refiner runs flat YTD and U.S. gasoline consumption -2 percent y/y over the last month. Nevertheless, we continue to see OPEC + non-OPEC production cuts, solid emerging market demand growth and modest OECD demand growth driving significant stock draws this spring which should support prices in the near term.

- Away from the oil market WTI and Brent received a bid this week from a stronger EUR/USD as Janet Yellen delivered a mixed assessment of the U.S. economy in prepared remarks which accompanied the expected 25 bp rate hike. Markets were dovishly surprised to see that Fed officials still expect to raise rates three times in 2017 instead of four, and the Fed looked dovish opposite surprise ECB talk of potentially tighter rates.

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Syncrude disruption, falling imports lift spreads

WTI spreads moved sharply higher this week as fire disrupted a 350k bpd Syncrude facility near Fort McMurray. The lost output pushed Syncrude-WTI to +3.50 for a nine-month high and within $1.50 of levels reached last winter during massive Canadian wildfires. The fire at the plant was extinguished as of Thursday but the continued bidding of Syncrude and Bakken crude in late Friday trading suggested continued stress on northern supplies. WTI spreads were also helped by a drop to 2.69m bpd in PADD III imports (6-month low) following a recent buildup of floating storage in the US Gulf Coast.

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The disruptions in Canada were the main drivers of spreads this week and helped push WTI M17/Z17 from -1.21 on Tuesday to a top of -0.67 on Friday. On a more bearish note there was large size buying of 1H’17 -75 and -100 puts (for 2-3 cents premium) this week in the CSO market with certain traders seeing sluggish demand and elevated U.S. output increasing the odds of Cushing congestion this spring. Cushing stocks added 2.1m bbls last week (their largest build since December) to 66m bbls and are expected to increase again next week. In Europe, brent spreads were relatively calm and moved slightly higher on continued OPEC-cut confidence. Brent M17/Z17 rallied from a weekly low of -0.78 on Tuesday to a high of -0.45 towards the Friday close. Related: Saudi Arabia Undermines The OPEC Deal By Increasing Production

U.S. producer data has continued its relentless bearish trend starting with a jump in the rig count to 631- its highest mark since September of 2015. In NYMEX WTI producers and merchants added 9k to their gross short position bringing the grand total to 710k contracts. Increased hedging and rigs have helped bring U.S. crude production back over 9.1m bpd for the first time since February 2016. North of the border rigs in Canada continued to decline last week falling to 180 and are lower by 27 over the last month.

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Sub $50 oil keeps option bid alive

WTI M17 option values were mostly unchanged w/w aside from a slight selloff in downside risk as crude oil rebounded on Thursday. As of Thursday afternoon WTI M17 implied vol traded 28.5 percent, 25 delta puts traded 31 percent and 25 calls implied 27 percent showing a slightly flatter skew to the put w/w. 20-day realized volatility was steady near 27 percent. Overall directional demand for options remained strong as oil’s dip below $50 inspired new directional ideas for trading in both directions. Away from the oil market volatility was fairly inexpensive with the VIX trading near 11 while EUR/USD was near 6.5 percent.

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EIA shows OPEC cuts at work but demand remains bearish

• U.S. crude inventories made a seasonally abnormal w/w draw with help from a sharp decline of imports into PADD III
• In product markets U.S. gasoline and distillate inventories are now at y/y deficits following sharp draws
• U.S. refiner demand and U.S. gasoline demand continue to lag and are both lower y/y by roughly 2 percent

U.S. crude inventories fell 237k bbls w/w due to a 7-month low print in USGC imports at 2.69m bpd. Overall stocks are now higher y/y by 7 percent, PADD I inventories have ballooned to +25 percent y/y, PADD II inventories are +2 percent y/y and PADD III stocks are +10 percent y/y. Overall imports printed 7.4m bpd this week and are lower y/y by 4.4 percent with help from OPEC cuts. Exports fell to 717k bpd and have averaged 764k bpd YTD. Crude inventories in the Cushing hub had a surprise 2.1m bbl jump to 66.5m bbls.

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DOE inventory data was generally bullish across crude oil, gasoline and distillates but the demand side of the ledger for US crude continues to disappoint. U.S. refiner inputs fell 20k bpd w/w and are lower y/y by 2.4 percent over the last month which could point to bearish problems beyond normal seasonal maintenance. On a regional basis east coast inputs are now lower y/y by 20 percent while PADD II and PADD III inputs are flat y/y. The WTI 321 crack traded near $17/bbl this week while RBOB/Brent traded $16/bbl/.

U.S. gasoline stocks continued to fall sharply with a w/w decline of 3m bbls. Overall gasoline stocks are now lower y/y by 1.4 percent over the last month. PADD IB stocks are higher y/y by 6 percent over the last month but rapidly normalizing towards appropriate seasonal levels due to a slowdown in imports. Overall east coast gasoline inventories are now flat y/y while PADD II stocks are higher by 2 percent and PADD III inventories are lower y/y by 1.6 percent. Domestic demand remains bearishly low at -2 percent y/y while exports at 535k bpd are +34 percent y/y.

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RBOB futures were mostly flat near the $1.60/gl mark and are lower by 10-cents in the lst week weeks. In spread markets RBOB J17/K17 rallied to a 6-week high at -1.58 Thursday for a 1.4 cpg rally over the last two weeks with help from decreased PADD I imports. Related: China’s Crude Oil Production Falls 8% Year Over Year

U.S. distillate inventories fell by 4.2m bbls w/w and are now lower y/y by 2.5 percent over the last four months. PADD II stocks fell 700k bbls and are lower by 2 percent y/y while PADD III stocks fell 530k bbls and are lower by 6.6 percent y/y. More bearishly, PADD IB stocks fell by 500k bbls but are still higher y/y by 5 percent over the last month. As for demand, domestic consumption enjoyed another large jump to 4.4m bpd and is higher y/y by 13 percent. Exports declined by more than 350k bpd to 964k bpd and are lower y/y by 28 percent.

Heating oil futures continued to sink this week despite the aforementioned inventory draw. On Tuesday afternoon prompt futures touched $1.4784/gl for a 3.5 month low and a 15-cent drop on the month. The prompt heating oil spread went in the opposite direction trading to a 6-week high over -0.60 for a 60 tic rebound in two weeks.

In Europe, gasoil stocks in the Amsterdam-Rotterdam-Antwerp hub had a modest weekly increase for the second straight week but are still lower y/y by 15 percent. Fuel oil stocks in the ARA hub increased by nearly 20 percent in just the last week to their highest mark on record. Further east, Singapore distillate stocks fell by 610k bbls w/w and are lower y/y by 7 percent. Floating refined product in Southeast Asia is lower by about 2m bbls over the last month at 13m bbls. In spread markets gasoil j17/k17 jumped from -2.75 on March 14th to -2.00 late in the week.

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By SCS Commodities Corp.

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Leave a comment
  • Mick on March 18 2017 said:
    One day they say OPEC is in trouble because of Shale, the next they say the cuts are working.

    LOL!!

    Hard fail..

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