1. Refined product fundamentals still improving
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We are still seeing the best signs of market rebalance in refined product data. U.S. distillate stocks are lower by 8 million bbls YTD and flat y/y. They increased by 14 million bbls in 2015. U.S. gasoline supplies are +3.5 percent y/y and PADD IB remains oversupplied but demand showed significant improvement this week by jumping to its highest mark on record at 10.4 million (m) bpd. U.S. implied gasoline demand is higher by 200k bpd y/y (+2 percent) over the last four weeks. Demand has been even better on the distillate side with exports + domestic consumption higher by 9 percent y/y over the last four weeks. Overseas, ARA gasoil stocks and Singapore distillate inventories are lower y/y by 27 percent and 8 percent, respectively.
2. Options are cheap- and for good reason
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If you have a strong directional view on crude oil then we have good news for you- owning options is cheap! The NYMEX/CBOE WTI volatility index has dropped from 56 percent on November 28th to 27 percent this week (14 month low) as realized volatility fell from 52 percent to 25 percent. There simply hasn’t been enough movement in the oil market to justify pricey options in December. Extra good news for bulls- options have maintained a bearish skew this week with WTI H17 25 delta puts implying 30 percent vol while 25 delta calls priced at 25 percent vol. Related: The Unsustainable $60 Oil Spike In 2017
3. Cushing’s bearish grip on spreads should weaken on exports, OPEC
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WTI m1-m2 traded down to 97 cents contango yesterday on continued pressure from ballooning Cushing stocks. Inventories in the hub increased by 172k bbls w/w to 66.4m bbls which is just 1.8m bbls shy of their all-time high. Looking ahead, our view is that Cushing will not drive signficant bearish moves in WTI spreads in the coming months as OPEC + non OPEC cuts- even if they only achieve 1/3 of their stated goal- which will be concentrated on North American clients take effect. Recent weakness in WTI-Brent arbs comfortably below the $2/bbl mark should also make room for continued high levels of U.S. exports towards Europe and Asia and ultimately lead to fewer barrels in Cushing.
4. US and Canadian production stay strong
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Recent upward revisions to U.S. production data by the EIA have stuck and reveal an impressive comeback in output. This week’s data showed a small decline in production to 8.78m bpd but the slightly lower mark is still higher by more than 200k bpd vs. October data and about 350k bpd higher than its July lows. The 29 percent increase in U.S. rigs since September and continued rallies in the WTI Cal ’17 swap should only help the cause of producers. Way up north, Canadian production has also strengthened by jumping 98k bpd m/m in November to within 137k bpd of its all-time high at 3.9m bpd. Related: U.S. Shale Could Break The OPEC Deal Within Months
5. Margin improvement should help refiner demand
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U.S. refiner demand has been extremely disappointing in December averaging 16.48m bpd over the last four weeks for a 1 percent y/y decrease. Utilization is currently 91 percent and lower by 1.5 percent y/y over the last four weeks. There is good news on the demand side, however, as the WTI 321 crack has rallied from $11/bbl in November to over $17/bbl this week for its best seasonal mark since 2013. For east coast refiners the RBOB/Brent crack has rallied from $10/bbl to $14/bbl in the last two weeks and overseas the gasoil/brent crack has rallied from $10/bbl to $12/bbl.
By SCS Commodities Corp.
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"Cushing is getting more oil partly because of seasonal factors. Every year, refiners in the U.S. Gulf Coast try to reduce inventories in December to lower their tax bills, traditionally parking excess crude in Oklahoma and elsewhere. Also, U.S. refineries typically process less crude at the beginning of the year, with January demand dropping by an average 899,000 barrels a day during the past five years.
Reductions in inventory by refineries in Texas and Louisiana “can contribute to outsized Cushing builds,” said Adam Longson, a commodities analyst at Morgan Stanley in New York."
This typical seasonal tax dodge may have been exacerbated by the potential for a Trump tax break in 2017, which would make the incentive for the maneuver that much greater? If so, the Cushing levels should decline relatively quickly in 1Q17...