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Expert Commentary: Libya Curtails OPEC Jawboning

Financial Market

- WTI moved sideways near $53 from the Sunday open through Thursday afternoon, submitting a high of $53.79 and a low of $52.08 along the way. The narrow $1.79 range over the last four days suggests to us that the market is still content to sit in a holding pattern until we get a stronger sense of how many of the 1.8m bpd that OPEC + non-OPEC exporters agreed to cut will actually be removed from the market. Traders were offered bullish statements from Saudi Arabia and Iraq midweek affirming that they are prepared to meet their ends of the supply cutting bargain and most analysts expect the group to perform on at least 50 percent of the agreed upon reductions. Normally this would have injected bullish momentum into the market but bearish news on the return of two previously shut in oil fields in Libya kept a lid on potential strength.

- On Wednesday Libya’s NOC reported output from their Sharara field of 50k bbls (330k bpd potential) while their El Feel field and its corresponding export hardware were also making progress towards a return in the coming days. Libya’s marketing arm is hoping that progress at the two fields will increase the country’s exports from 600k bpd to more than 850k bpd in the next three months and the market took the news seriously with the prompt m1-m2 brent spread moving from 56 cents contango to a weekly low of 81 cents contango.

- To us, Libya’s presence as the key bearish input in a market that is already moving towards balance feels unsustainable given the high probability of meaningful output cuts beginning January 1. Yes, OPEC and Russia have a proud history of cheating on deals to reduce crude oil supply but that doesn’t mean that they won’t significantly accelerate the tightening of the oil market even if they only achieve 1/3 of their committed cuts. In this week’s sign of rebalance we saw sharply accelerating U.S. distillate demand, a large increase in U.S. gasoline demand, ARA gasoil stocks and Singapore distillate stocks which are lower y/y by 32 percent and 13 percent, respectively, and U.S. product inventories which continue to trend lower towards normal seasonal levels. It will be difficult for the possibility of another 250k – 300k bpd from Libya to stem this bullish tide for long. Related: The U.S. Oil Rig Count Hits Its Highest Level Since January

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Libya, PADD II imports keep pressure on prompt spreads

U.S. producer data continued recent trends last week beginning with an increase in the NYMEX WTI producer/merchant gross short position to 670k contracts- an increase of 33 percent since June. The rig count, meanwhile, increased for the 27th time in 29 weeks and at 510 rigs is high by 61 percent since May. U.S. production was essentially flat w/w at 8.79m bpd representing an increase of 336k bpd since October.

Prompt WTI spreads steadied at low levels this week under pressure from +66m bbls in Cushing and PADD II crude oil stocks that are +6 percent y/y. PADD II imports have been about 200k bpd higher y/y over the last five weeks sending more oil into Cushing and- this week at least- helping create resistance for WTI m1-m2 at -0.80 before the spread eventually sold off towards -0.90. Further back in the curve WTI M17/Z17 weakened from -25 cents on Monday to -50 cents on Thursday.

Diff markets saw continued strength for Midland crude this week which mostly traded in the +100 area. WTIBrent arbs continued their weak ways with the H17 contract trading near -1.95 and within a nickel of its 1yr low. Most of the arb’s weakness was attributed to expectations that OPEC supply cuts will tighten brent trading hubs. We still expect to see limited downside for WTI-Brent trade groups eager to export U.S. crude to Asia. Up north, Bakken-WTI jumped to -1.30 opposite elevated PADD II imports.

Prompt brent spreads came under pressure this week due to the reopening of two oil fields in Libya which could boost output from current levels of ~600k bpd to more than 850k bpd by March. The prompt brent m1-m2 spread traded down to -0.82 on Wednesday after trading as high as -0.56 on Tuesday. In the 2nd half of 2017 brent spreads were relatively calm with Brent M17/Z17 moving slightly lower to -22 cents.

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Speculative shorts have been liquidated close to multi year lows, if history holds they might miss a bearish move

Managed money was a net buyer of of both NYMEX WTI and ICE Brent contracts in the week ended December 13 with gross longs essentially flat w/w while gross shorts were reduced by modest amounts. Short covering has helped to bring net length in NYMEX WTI to its highest level since mid-2014 while ICE Brent length is now at its highest mark ever. To U.S. the most interesting component of speculative positioning at the moment is the extremely low amount of short positions currently held by funds given that similar scenarios have regularly predated sharp moves lower in oil going back to January 2014. In 2014 the low mark for gross short positions in NYMEX WTI came in June at 20k contracts. June 2014 also included that year’s top tic in crude oil in a move from $107 to $55 by year-end. In 2015 the nadir in NYMEX WTI gross short positions came in May opposite oil’s peak at $60 before it eventually moved down to $35 by Decemberd. In 2016 managed money was correct in holding small short positions in April and May but u
ltimately whiffed on a steep move lower by liquidating shorts in October before a move from $52 to $42.

COT data for refined products was unremarkable last week and included a 2k reduction in net length for RBOB while Heating Oil net length increased by about 3k. In ETF world the USO had net outflows of $16 million for the week ended December 16th, bringing the total of its three straight weeks of outflows to $581 million.

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Narrow range sends crude options to lowest level since 2014

WTI H17 volatility sold off across the skew this week opposite a drop in the NYMEX/CBOE WTI volatility index to its lowest level since November of 2014. Some of the causes of cheapening option premiums have been higher underlying levels and expectations of a range bound market. The conclusion of the OPEC deals has also temporarily answered key questions for oil and removed demand for options in the short term. However, WTI H17 50 delta volatility at 27.5 percent on Thursday (down 5 vols w/w) looks somewhat cheap to U.S. opposite realized volatility (20-day basis) near 48 percent. Skew remains moderately bearish wit H17 25 delta puts trading at a 5 vol premium (30 percent) to 25 delta calls (25 percent.)

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Diesel demand leads the way in EIA report

- U.S. crude oil inventories increased by 2.3m bbls w/w with help from a nearly 8m bbl w/w increase in imports

- U.S. refiner demand finally showed signs of life with a 184k bpd increase to 16.7m bpd

- Refined product inventory data was also more bullish than expected with a strong jump in domestic RBOB demand while Heating Oil demand jumped a surprising 14 percent w/w

US crude stocks added 2.3m bbls w/w and are now higher y/y by 7 percent. PADDs I, II and V lead the gains due to largely to import increases into each region. Overall imports increased from 7.4m bpd to 8.5m bpd and are higher y/y by 1 percent over the last four weeks. PADD II stocks increased by 1m bbls and are higher y/y by 6 percent. PADD III stocks declined by 443k bbls and are higher y/y by 11 percent. Cushing stocks declined for the first time in three weeks falling 245k bbls to 66.3m bbls.

U.S. refiner demand had a solid w/w jump of nearly 200k bpd bring overall inputs to 16.7m bpd. Refiner inputs are lower y/y over the last four weeks by 1 percent and have only increased YTD by 0.8 percent v. 2015 proving to be a thorn in the side of oil bulls this year. In looking for good news, the WTI 321 crack has jumped from $11.40 in mid-November to $16 and looks strong on a seasonal basis. The LLS 321 crack also has also moved from $5/bbl in November to $11 to trade at its highest seasonal level in at least five years. Overseas, however, the Gasoil/Brent crack moved lower to $10.50/bbl this week.

Gasoline inventories unexpectedly fell 1.3m bbls w/w and are now higher y/y by just 3.7 percent. PADD II stocks jumped 1.3m bbls but are now actually at a y/y deficit of 1.9 percent. In the USGC PADD III stocks fell by 444k bbls w/w and are higher y/y by 3.4 percent. The most bearish component of the gasoline picture continues to be the 10 percent y/y surplus in PADD IB after stocks were essentially flat w/w. On the demand side, domestic consumption increased sharply by 395k bpd to 9.3m bpd (+1 percent y/y over last month) but exports fell 336k bpd. Related: The Arctic Drilling Ban: Much Ado About Nothing?

RBOB futures strengthened early this week moving from $1.56/gl on Monday to $1.61/gl Wednesday with help from an outage in Whiting which created a small rally in Chicago gasoline. Futures have rallied an impressive 30 cents since their November 14 low at $1.27/gl. In spread markets RBOB M17/Z17 traded over +24.50 cpg for a 6month high and a 5-cent rally since July. The RBOB/Brent crack rallied to seasonally strong levels this week trading $13/bbl for a $3 rally in the last two weeks,

Heating oil flat price and time spreads trended lower this week despite the continued normalizing of supplies and strong increase in domestic demand. In flat price HO’s high print came on Monday at $1.69/gl before selling off to $1.625/gl which is within two cents of its December low. Spread markets were similarly bearish with M17/Z17 selling off from a high of -4.20 cpg on Wednesday to -5.5 cpg on Thursday.

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Distillate inventories enjoyed a seasonally abnormal 2.4m bbl draw this week and are now higher y/y by just 1.5 percent. Most of the draw came from PADDs IA and IC while PADD IB remained a tad thorny for distillate bulls falling only 70k bbl w/w to bring the region’s stocks higher y/y by 7 percent. PADD II stocks are higher y/y by 4.9 percent while PADD III stocks are lower y/y by 1.7 percent. The real star of the distillate report was domestic demand which jumped 13 percent w/w to 4.5m bpd. Domestic consumption is now higher y/y by 14 percent over the last month. Exports at 1.1m bpd are lower by 6 percent y/y.

This material is provided for informational purposes only and should not be construed as trading advice. Certain statements may reflect the opinion of the author. The risk of trading in futures and options can be substantial. All publications and reports, including this specific material, used and distributed by affiliated company, SCS Commodities Corp., should be considered a solicitation. SCS Commodities Corp. does not maintain a research department as defined in CFTC rule 1.71.

All data and charts in Crude Oil Market Notes are recovered from Bloomberg unless otherwise noted

Gasoil spreads corrected lower this week despite more bullish data in ARA perhaps due to profit taking after a 5-week relentless rally. Gasoil M17/Z17 had rallied from -$19/t to -$8/t but corrected back towards -$10/t on Thursday. In Europe, gasoil stocks in the ARA hub fell by 22k mt w/w and are lower y/y by 32 percent. Singapore distillate stocks jumped by more than 1m bbls w/w but are still lower y/y by 13 percent.

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By SCS Commodities

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