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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Saudis Force Russian Ural Blend To Discount In This Key Market

Juxtaposed with the 45th birthday of comedian Sarah Silverman, the crude complex is looking rather surly and serious today. While the OPEC meeting and Nonfarm Friday lurks (like an 800-pound gorilla) at the end of the week, a new month brings an onslaught of economic data to weigh up, kicked off overnight by Chinese manufacturing.

The official manufacturing PMI came in at 49.6, below consensus (of 49.8) and showing ongoing contraction. Its nemesis, the Caixin manufacturing number, came in slightly better than expected (48.6 vs. 48.3), but also underscoring the theme of a shrinking industrial sector. Japan’s manufacturing print was below consensus at 52.6, but showing expansion for the sixth consecutive month (let’s be glass half-full about this, folks).

Onto Europe, and the Eurozone PMI manufacturing number was in line with consensus at 52.8, aided by better-than-expected prints from Germany, Italy, and Spain – while France provided headwinds. Eurozone unemployment ticked down to 10.7%, the lowest rate since January 2012 (hark, below). The disappointment of the day thus far comes from Brazil, with its economy shrinking by a larger-than-expected 4.5% YoY for Q3, contracting 1.7% on the prior quarter…its third consecutive quarterly drop. Related: Saudi Cash Crisis Intensifies As Interbank Rates Soar

Eurozone unemployment, % (source: investing.com)

A piece in today’s Wall Street Journal addresses how Saudi Arabia has been aggressively marketing oil into European countries such as Poland and Sweden, challenging Russia’s stronghold in the region. This has caused Russia to respond by selling its oil (Urals) into Europe at almost triple the discount in October, according to OPEC’s monthly report. Saudi’s OSP (official selling price) for January into Europe and Asia is expected to be priced aggressively once again, as the battle for market share intensifies.

Related: An Unnoticed Casualty of The Commodities Price Drop

An added dimension to this battle is going to come early next year with the return of Iranian barrels. As the image at right illustrates, Iran provided 5% of EU crude imports prior to economic sanctions.

As our ClipperData illustrate below, the majority of Iranian exports currently make their way to Asia (~80%), with China being the leading recipient (40%), followed by India (14%) and Japan (12.5%). With the lifting of sanctions, we will see both a higher volume of exports from Iran, with a larger variety of destinations (think: the EU).

(Click to enlarge)

Iran crude oil exports (source: ClipperData) Related: This British Bank Is Backing The Bullish Case For Oil

Despite the dollar weakening – and the euro strengthening – on the back of stronger Euro-centric economic data, the impending API report later today and tomorrow’s weekly EIA inventory report is set to bring focus back onto a saturated US oil market, as US inventories are just shy of a record high for both total stocks and for PADD3 (the Gulf coast).

Nonetheless, as of yesterday, 49 vessels are waiting in the Gulf of Mexico to discharge just under 37 million barrels. (Normally we only see 10 million barrels waiting at any one time). So despite gasoline prices getting a boost today from a variety of refinery issues and a rally in RINs, crude is once again weighed down by oversupply concerns.

By Matt Smith

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