-Global crude oil inventories are drawing rapidly. US crude supplies have dropped from 536m on in late March to 466m (a 20-month low) as of last week implying average daily draw downs of 518k bpd over the last 4.5 months. By contrast, US crude stocks only fell by about 11m bbls during the same period in 2016 and the average draw during the same period from 2012-2016 was 28m bbls. OPEC data was also supportive of this story with JODI reporting Saudi exports to a 3yr low of 6.9m bbls in June with Saudi inventories fell to 257m bbls representing a 5.5yr low.
- Spreads and differentials have responded to inventory draws in dramatic fashion with Brent m1-m2 trading to 29 cents backwardated this week while DFL Brent rallied 30 cents to -20 for a 3yr high. Midland-WTI flipped into positive territory (opposite weak wti/brent) at +40 for the first time in six months.
- Nevertheless, the sideways flat price chorus has only strengthened despite evidence of improved fundamentals and this week we saw Citi forecast a $40-$60 range through 2022 while the IEA noted that OPEC’s efforts to drive global inventories lower will require them ‘digging in the for the long haul.’ Finally, Andy Hall lamented the deterioration of global oil fundamentals pointing out that OPEC’s need to extend and potentially deepen production cuts was a good indication of the market’s inability to self correct.
- Given the aggressive global drawdown environment we believe the market could be under pricing geopolitical risk. Yes, over a longer horizon US shale is clearly an effective swing producer in the market in terms of moderating upside risk but on a short term basis supply threats in Nigeria, Libya and Venezuela seem to be elevated by the rapid inventory draw environment. We don’t have an overly optimistic view of flat price above $50 but are thinking that this is increasingly looking like a buy the dip market (perhaps in the mid $40s) as long as inventories are rapidly falling and geopolitical risk is largely ignored.
- It was an exciting week for bond, currency and equity markets due to WH drama and a surprisingly dovish ECB meeting. In general there was a broad flight to quality with UST 10yr yield at a 2 month low, gold at a 10-month high and USD/JPY at a 4-month low. Odds of a December Fed rate hike have decreased from 53 percent to 40 percent over the last month (via Fed funds futs) but with the ECB now seemingly in ‘talk down the Euro’ mode it’s hard for us to view the macro picture as supportive for oil.
WTI-Brent weakness accelerates
US vs. global fundamentals continued to diverge this week leading to the lowest print in the Z17 WTI-Brent contract since December of 2015. In the US, Cushing stocks seem to have reached a cyclical bottom near 58m bbls and the relentless w/w increases in US production continue to moderate upside risk. WTI 1-month spreads in the front of the curve maintained a relatively strong 10 and 20 cents contango, however, as strong demand and exports maintained a fundamental floor which should perpetuate aggressive stock draws in the medium term. On the brent side, decreased North Sea loadings and OPEC adiscipline were cited as underpinning brent strength.
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US crude production continued to defy gravity this week with a massive 79k bpd w/w jump despite a flat rig count and decreased WTI hedging. Total US crude production printed 9.5m bpd representing a 25-month high and has climbed an incredible 1.07m bpd since July of 2016. As for drilling activity, US crude rigs stand at 763 which is +16 rigs over the last ten weeks after climbing by 69 rigs in the prior ten week period. In commercial flows we’ve seen a continued decline in NYMEX WTI gross shorts held by producers and merchants from 713k in May to 603k last week while brent hedging continued to climb. Related: The Strategic Petroleum Reserve Is Slowly Dying
Overseas markets continued to reveal strength this week via a contract high print in V17/Z17 brent at +43 while VLCC rates sank to new 2017 lows. Global floating crude was flat near 174m bbls which is lower by about 10m bbls on the month. Analysts from SocGen and Energy Aspects both noted that brent spread strength could be transient and was built on lower North Sea production and elevated WAF flows to Asia. Further back in the curve, strength in the CAL ’18 brent swap near $53 seems to have introduced new producer hedges into the market with ICE BRENT commercial gross shorts +11 percent over the last month.
Six straight weeks of fund buying, six straight weeks of retail selling
Hedge funds were net buyers of NYMEX WTI and ICE Brent (on a combined basis) for the sixth straight week last week due to both short covering and addition of new length in the market. While it’s noteworthy that hedge funds are getting increasingly long we don’t feel that the position is looking overly aggressive in a way that could compound a bearish move. In NYMEX WTI net length fell slightly w/w and there was a small addition of new shorts. In ICE BRENT, however, net length jumped by a whopping 58k contracts with help from a 19k contract reduction in shorts. Combined, ICE BRENT and NYMEX WTI net length stands at 680k which is 32 percent above its 2yr average. Gross shorts in the two contracts stand at 149k and are 25 percent below their 2yr average.
Hedge funds were also net buyers of refined products last week bringing net length in gasoline +2,500x w/w to 47k and net buying heating oil by 6,500x w/w to bring net length in HO to 25k. The combined net length in Heating Oil and RBOB stands at a 6-month high. In ETF world the USO saw net outflows for a sixth straight week- this time for $22 million.
Crude stocks fall to 20-month low
• US crude stocks fell nearly 9m bbls w/w and are now lower y/y by 5 percent.
• Strong demand and fewer barrels from OPEC continue to underwrite aggressive crude draws
• The strength of domestic gasoline demand depends on who you ask. The API reported seeing July demand +1 percent y/y at 9.69m bpd for its highest mark ever, while EIA data for the week showed domestic demand -2.5 percent y/y over the last four weeks. Related: Has Gulf Of Mexico Production Peaked?
US crude stocks fell 8.95m bbls w/w to their lowest level since January 2016. Overall stocks stand at 466m bbls which is -5 percent y/y and are lower by 69m bbls since the end of March meaning that crude stocks have dropped by roughly 500k bpd for the last four months. PADD I inventories are -9 percent y/y, PADD II stocks are -2 percent y/y, PADD III inventories are -5 percent y/y and Cushing inventories jumped by 678k bbls to 57m bbls. PADD II imports printed 2.7m bpd and are +7 percent y/y while PADD III imports at 2.8m bpd are lower y/y by 21 percent.
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US refiner inputs had a slightly w/w drop to 17.6m bpd and are higher y/y by 4.4 percent. PADD II inputs are currently running near 3.9m bpd which is +4 percent y/y while PADD III inputs at 9.3m bpd are +5 percent y/y. Refinery utilization is running 96 percent which is higher y/y by 2.7 percent. Refining margins were slightly lower this week with the WTI 321 crack trading $19/bbl while RBOB/Brent V17 traded $11.65 percent. Gasoil/ brent also ran into resistance at $13/bbl and traded near $12.80/bbl late in the week.
US gasoline data was highlighted by a 1m bbl w/w drop in PADD IB where stocks are now lower y/y by 15 percent at 31.6m bbls. Overall gasoline inventories were flat w/w (and flat y/y) after PADD II stocks fell by 1m bbls (+6 percent y/y) and PADD III inventories added 186k bbls to stand +7 percent y/y. Gasoline production is actually slightly lower y/y @ -2.3 percent despite elevated refinery runs but imports printed 667k bpd last week and are +9 percent y/y over the last month. On the demand side gasoline exports printed 670k bpd while domestic consumption at 9.5m bpd is lower y/y by 2.5 percent.
US distillate data was mostly in line with expectations leading with a 700k bbl overall draw. US distillate supplies currently stand at 148m bbls and are -3 percent y/y over the last month. PADD IB inventories added 200k bbls and are -11 percent y/y, PADD II stocks fell 467k bbls to +7 percent y/y and PADD III supplies added 3m bbls to reach a y/y surplus of 8 percent. Refiner production of distillates is currently running near 5.3m bpd which is higher y/y by 7 percent. As for demand, US distillate consumption printed 4.2m bpd and is +21 percent y/y over the last month. Distillate exports at 1.1m bpd are -11 percent y/y.
By SCS Commodities Corp.
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