• Financial markets went into recovery mode this week as central bankers from the U.S. Fed, Bank of England, ECB and BoJ worked to reassure markets of their willingness and capacity to provide monetary support as needed in response to last week’s vote and ensuing market chaos. Their comments were effective in the short term as global equities recovered most of their losses from last Friday and the FTSE 100 even rallied into the black week on week (w/w). Most importantly, expectations mounted that central banks would work to expand monetary accommodation and Fed futures actually implied greater odds of a rate decrease than hike through 1Q17. Strategists at two large banks even wondered if Britain’s vote could accelerate the arrival of helicopter money. In government bonds the U.S. 10yr yield traded near 1.45 percent on Thursday while German and Japanese 10yr yields descended further into negative territory.
• As for crude oil, WTI traded in tandem with S&Ps and the EUR/USD as markets shifted between risk-on and risk-off. Option markets were curiously cheap following the VIX and EUR/USD vol in a cross-asset volatility dip. WTI Q16 50d implied volatility fell from 42 percent last week to as low as 36 percent this week while realized volatility jumped from 19 percent in mid-June to as high as 43 percent this week. This discount of implied volatility v. realized vol hasn’t occurred in WTI since early April and given this dynamic we see good value in expressing directional bets via prompt maturity call and put spreads. Traders may have to settle for singles and doubles however as we continue to see a mostly range bound environment for WTI in the short-term around the $45 - $50 area.
• While flat, Brent and WTI recovered on Tuesday and Wednesday and spread markets continued to weaken under the stress of well addressed fundamental headwinds in addition to more a more rapid than expected return of Nigerian exports to the market. WTI Q16/Z16 and Brent U16/Z16 both traded down to their lowest level since February while RBOB Q16/U16 sold off to its lowest mark of 2016 after east coast gasoline stocks reached a record high.
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With outages fading, spreads show concern that market is moving back into generous surplus
Spreads in the U.S. and Europe moved deeper into contango this week as the return of Canadian barrels (expected) and the speedy return of Nigerian production (not expected) erased the briefly lived, but abnormally high level of unexpected outages and returned the spread narrative back towards a generously oversupplied physical market. In North America traders also remained focused on the return or non-return of U.S. production with the recovery of Canadian output now priced into the market. In the last week, data included a fall of 7 in the U.S. Baker Hughes rig count to 330 while production fell by more than 50k bpd to 8.62m bpd and is now 1m bpd lower than its 2015-high. With Calendar 2017 WTI swaps still trading in the middle $50s, we continue to believe that signs of green shoots from U.S. producers such as DUC development or additional flattening in the rig count will have a psychologically bearish effect on the market despite the consensus forecast for more U.S. production declines later in 2016.
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WTI spreads moved sharply lower this week from the prompt 1-month spreads through Z16/Z17. In the front of the curve, WTI Q16/U16 matched its 2016 low with a -0.75 print on Tuesday while Z16/Z17 traded -2.50 for its lowest print since April. The weakness in Calendar 2017 spreads was accompanied by more bearish option positioning from trade groups and funds. As of Wednesday, total open interest in the WTI CSO 1H17 -50 put reached more than 15k contracts (WA + 7A) for an increase of more than 12k in just the last two weeks.
Overseas, two of the main stories affecting prompt Brent spreads were increased output from Nigeria back towards 1.9m bpd after dipping as low as 1.1m bpd and a possible strike in Norway that could disrupt between 250k – 300k bpd of production beginning next week. Financial deterioration in Venezuela also made headlines with some analysts suggesting that the country’s output could fall from 2.3m bpd to 1.7m bpd by 4Q16 as PDVSA struggles to pay contractors.
Adding to the bearish news flow, JP Morgan analysts suggested this week that a slowdown in reserve building in China is likely and could reduce the republic’s imports by as much as 15 percent in 2H16 which would remove about 1.1m bpd of demand from the market. In the Middle East, Reuters expects Iran to export 2.14m bpd of crude in July after shipping 2.31m bpd in June and cited a Clipper Data estimate which put exports from Iran, Saudi Arabia and Iraq higher by 2.3m bpd YTD through May in 2016. Brent U16/V16 moved to a three month low at -0.53 on Wednesday for a +20 cent loss since the beginning of June. In deferred spreads Z16/Z17 traded down to -3.14 on Thursday for a three month low and a $1.50 drop on the month. Related: Is Raymond James’ $80 Oil Realistic?
Speculators still playing wait and see
Managed money grew their net length in WTI from 191k to 213k w/w, which is essentially unchanged for more than three months now. During this time gross longs have been flat near 300k contracts while gross shorts have averaged 80k. In ICE Brent, net length had a slight decrease to 363k. In refined products, managed money increased their net long in RBOB to 7k and were also net buyers heating oil for a second straight week bringing the total net long (currently 17k) to a new 2yr high.
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In the producer/merchant crowd the net short in NYMEX WTI was left alone at 266k while the net short in ICE Brent was unchanged at 718k. The USO has received net inflows of about $20 million over the last three weeks in another indication of the speculative crowd’s ambivalence towards crude oil in the $50 area.
Option markets surprisingly calm-post Brexit
Option premiums moved lower across the skew this week while maintaining a healthy put-tilt. As of Thursday morning, WTI Q16 25d puts implied 42 percent volatility while 50d calls priced at 37 percent and 25d calls priced at 36 percent. On a w/w basis ATM volatility was lower by 3 percent and lower by 4 percent over the last two weeks. The drop in implied volatility was conistent with the move in EUR/USD 1-month vol from 12.5 percent to 9.7 percent and a move lower in the VIX from over 26 last week to 16.4 on Thursday. However, the move higher in realized volatility this week from 38 percent to 43 percent (20-day basis) marks the first time implied volas have traded at a discount to realized volatility since April and could generate good short term long-options opportunities in coming weeks.
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DOEs show bullish crude oil stats but gasoline glut worsens
• Crude oil stocks fall more than expected with PADDs II, III and Cushing enjoying large draws. Crude imports fell by 884k bpd following last week’s 2016-high.
• Refiner demand also jumped after several weeks of lackluster efforts. Inputs jumped 190k bpd w/w to 16.7m bpd
• In refined products, gasoline stocks jumped 1.4m bbls including a 3.8m bbl increase in PADD I and a 500k bbl increase in PADD IB. Mogas demand also fell by 106k bpd
EIA stats showed a larger than expected crude inventory draw of 4.05m bbls bringing overall stocks to 527m bbls (+13 percent y/y.) All five regions showed w/w draws lead by PADD II (-2.7m bbls w/w) and PADD III (-425k bbls) while Cushing drew by 951k bbls. Production fell by 55k bpd w/w (largest weekly drop since April) to 8.62m bpd which is its lowest level since September 2014. Crude oil imports fell to 7.55k bpd for a decrease 884k bpd w/w and have averaged 7.8m bpd in 2016 after averaging 7.34m bpd in 2015.
Refiner inputs jumped 190k bpd w/w to 16.7m bpd and are flat y/y over the last month. Utilization increased to 93 percent and is lower by 2.8 percent over the last four weeks y/y. Refining margins continue to struggle with the WTI 321 crack under $15 this week for the first time in late June since 2010 while gasoil/Brent traded at $10.25/bbl for a 7-yr seasonal low. The LLS 321 crack traded from $9-$10/bbl.
Gasoline inventories added 1.4m bbls w/w and are now higher y/y by 10 percent. PADDs II and III fell by 281k bbls and 1.6m bbls, respectively but PADD I stocks added 3.8m bbls to reach an all-time high for the east cost and PADD IB added 500k bbls. Imports continue to drive overall stocks higher with an increase of 28k bpd to 904k bpd (+11 percenty/y.) Gasoline production fell by 330k bpd to 9.96m bpd and is higher y/y by 1 percent. Domestic gasoline demand fell 106k bpd to 9.7m bpd (+1.8 percent y/y on the last four weeks while exports at 395k bpd are lower y/y by 4 percent.
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RBOB futures followed crude oil higher from late Monday to Thursday morning printing a weekly low of $1.47/gl and a weekly high of $1.5380. This completed gasoline’s third straight month of trading around the $1.50/gl area. Spread markets reacted to yet another bearish round of DOE stats by trading to new 2016-lows. In the front of the curve Q16/U16 moved to a low of -0.65 on Thursday. Related: Zombie Stocks Brought Back To Life By Lithium Boom
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Distillate stats were better than expected lead by a 1.8m bbl overall draw and a 1m bbl draw in PADD IB. Unfortunately, overall distillate inventories remain higher y/y by 11 percent while PADD IB stocks are higher y/y by 29 percent. Distillate demand jumped to 4m bpd but remains lower y/y by 2.9 percent over the last four weeks while exports at 1.3m bpd are higher by 7.4 percent.
Heating oil futures joined the rest of the complex in rallying from a weekly low of $1.42/gl on Monday to a high $1.53.50 - a consistent level of resistance for the N16 contract over the last two weeks. Prompt spreads remained bearishly in contango with Q16/U16 bouncing around the -1.65 area.
Overseas, gasoil spreads continued to tumble this week despite a healthy stock draw in Singapore and a modest draw in the Amsterdam-Rotterdam-Antwerp hub. By Thursday afternoon Gasoil Q16/U16 traded -4.25. Prompt gasoil futures rallied from 420 to 450 before paring gains to 443 on Thursday.
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[1] Rascouet, Angelina. Venezuela’s Oil Output Decline Accelerates as Drillers Go Unpaid. Bloomberg. June 28 2016.
[2] Oil Bulls Beware Because China’s Almost Done. Bloomberg. June 30 2016.
[3] Iran’s July oil exports to fall but 70 pct higher than year ago. Reuters. June 30 2016.
By SCS Commodities Corp.
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