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'Epic' Oil Rally Reverses On Diminishing Supply Outages

Offshore platform at night

The recent oil rally is finally hitting the brakes, with prices retracing today on supply developments relating to Iraq and Nigeria, while vehement short-covering has brought financial positioning back from the ledge of bearish extremities. Hark, here are five things to consider in oil markets today:

1) Petronas, Malaysia's state-run oil company, has seen its profits shrink 96 percent last quarter, as ongoing lower oil prices have crushed net income from 9.1 billion ringgit a year ago to 348 million in Q2.

Petronas is looking to lower capital expenditure (sound familiar?) by 20 billion ringgit this year, increasing this to 50 billion over the next four years; it is likely to raise debt and draw down its cash reserves to cover spending.

While Malaysia imports a considerable volume of heavier crude for its refineries, it exports its light sweet grades such as Tapis to predominantly Asia. As our ClipperData illustrate below, India is the leading recipient of Malaysian crude, followed by China, Indonesia, Australia and Thailand.

(Click to enlarge)

2) We saw a few milestones achieved in the last week: oil prices completed their longest rally in four years after pushing higher for seven consecutive days, U.S. rig counts rose for the longest period since April 2014 with eight consecutive weeks of clambering higher, while short positions were cut by the biggest amount on record, according to CFTC data.

Net long positions for both Nymex and ICE positions increased dramatically, as short positions were covered; this meant the net long position increased by 54 million barrels, even though outright long positions only rose <1 million barrels.

(Click to enlarge)

3) Iraq is set to resume crude exports from three fields in the northern part of the country, after an agreement was reached to resume exports through a pipeline controlled by KRG (Kurdistan Regional Government). Related: Can Oil Prices Continue To Rally Like This?

Three oil fields in Kirkuk are operated by the National Oil Company, but exports were halted from these fields in March after a payment dispute with the KRG over the use of the pipeline. Our ClipperData show current crude exports are 3.2 million barrels per day from the south of the country; exports from the north currently sit at ~450,000 bpd, apparently soon to rise to ~600,000 bpd.

(Click to enlarge)

4) News of a potential ceasefire in Nigeria between militants and the government has been met with a good deal of skepticism, and rightly so given previous false starts. Even after the government has recently resumed payments to militants, sabotage has continued. Force majeures persist for Qua Iboe, Forcados, Bonny Light and Brass River. Related: How Artificial Intelligence Could Help Transform The Oil Industry

Taking a look at crude loadings in our ClipperData, removing these problem grades for this year (as well as Forcados), Nigerian crude loadings otherwise have held up darn well, rising strongly in February and April - and showing improvement in August as well (not shown). Hark, nineteen other export grades have accounted for ~950,000 bpd of exports through the first seven months of the year:

(Click to enlarge)

5) Finally, the recent rampant rally in crude prices in the last week and a half is filtering its way through to retail gasoline prices; the national average has ticked higher to $2.16/gallon. As we have now passed the peak of summer driving season - and given the current glut of gasoline in the U.S. - we should see pricing easing lower towards one-dollardom in the coming months:

(Click to enlarge)

By Matt Smith

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