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Expert Commentary: Bloated Inventories Keep Oil Prices Capped


• WTI consolidated near the $45 mark this week and achieved just a $2.40 range from Monday through Thursday as Summer Doldrums took effect. News flow and volumes were light with most of the usual suspects (FX, Nigeria, Libya and crude + product gluts) driving small, tired looking moves which never really gained momentum with the exception of Wednesday’s $43.69 print for a two-month low. We continue to see a range bound market for the near term feeling neither strongly bullish nor bearish about $45 oil. On a longer horizon we also continue to feel that an FX + gasoline driven move below $40 would invite significant speculative length into the market and likely be good buying opportunity for flat price and WTI Z16/Z17.

• On the bearish side bloated products stocks on a global level, abysmal refining margins, lackluster refiner inputs, more evidence of ‘flattening’ U.S. output via the rig count and production data and strong output from core OPEC + Russia continue to weigh on the market and limit upside risk. More specifically, Libya’s loading of a 600k bbl tanker from its Hariga port on Wednesday also added pressure this week by slightly reducing supply strain from one of the markets consistent underperformers. In currencies the DXY’s 4-month high print this week at 97.23 was bearish for oil while the EUR/USD was mostly flat trading between 1.1000 and 1.1050. As for flows, sentiment in the market remains largely negative as evidenced by five straight weeks of net selling of ICE Brent by hedge funds.

• More positively, the longer-term belief that the market is moving towards balance endures and was helped by a ninth consecutive weekly U.S. crude oil inventory draw reported Wednesday. Nigeria also added bullish pressure to front Brent spreads after ExxonMobil declared force majeure for the next month on the country’s largest crude oil stream due to a pipeline leak (via Reuters.)

• Away from oil markets S&Ps traded to record level this week at 2,170 sending the VIX to a 2yr low at 11.4. The US 10yr yield reached a post-Brexit high of 1.62%. The ECB held rates steady this week but comments from Mario Draghi regarding ‘public backstops’ for European banks sent gold from $1,310 to $1,330 on Thursday. 

(Click to enlarge)

WTI, Brent spreads diverge

A continued flattening of U.S. producer trends – alongside bloated crude and mogas stocks and tepid demand – helped push prompt WTI spreads to new contract lows this week. On the production side overall output jumped by 9k bpd for the second increase in as many weeks. It is important to note, however, that both weekly increases were due to gains in Alaska while production in the lower 48 has declined for eight straight weeks. The U.S. rig count has also contributed towards bearish concerns by increasing in six weeks out of the last seven.

WTI U16/Z16 lost nearly 30 cents this week trading down to a weekly low of -2.23 due to the aforementioned bearish trends which were exacerbated by a crude oil build in Cushing and yet another build of gasoline in PADD IB. In Cal ‘17 spreads WTI Z16/Z17 gave back just about every penny of last week’s strength moving from -3.00 to -3.95 with trade groups busily selling WTI spreads while buying Brent spreads. Trade groups were also active sellers of WTI Cal ’17 and 1H’17 flat calls this week in spread option markets but interest in buying puts slowed. Related: Shale Drilling Set To Take Off In Argentina

Prompt Brent spreads continued to move higher this week with help from a massive short cover from trade groups and funds. News that Nigeria’s Qua Iboe stream will remain under force majeure for at least another month due to a pipeline leak accelerated the bid for Brent spreads. As a result, Brent U16/Z16 rallied from a low of -1.97 to over -1.30 on Thursday. Further back in the curve, however, Brent Z16/Z17 lost about 60 cents on the week to trade near -4.30 on Thursday afternoon.

Funds still not excited about crude oil

The most recent round of COT data revealed hedge funds as net sellers of ICE Brent for a fifth straight week. During that time net length has dropped by 22% and is lower by 27% since its peak in April. Going back to May, ICE Brent gross length has been cut by 75k contracts while gross shorts have jumped by 47k contracts. In NYMEX WTI, gross longs have been cut by 20k contracts since April while gross shorts have increased by 51k. In product markets managed money has cut their net length in RBOB from 34k in March to just 1,200 while heating oil net length has grown to 21k.

Sideways trading sends option prices lower

Implied volatility for crude options sank below 36% Wednesday after WTI managed just a $2.49 range in the eight trading days from July 8th through July 19th. By Thursday morning WTI U16 at the money volatility had dipped below 35%, 25 delta puts traded at 37% and 25 delta calls traded at 33.6%, which was a slightly more flat skew than the market had revealed in recent weeks. Realized volatility (20-day basis) was steady at 50% this week which continues to make options look like a good value for expressing directional puts. Unfortunately, we must admit this relationship has looked attractive to us for long-options strategies for several weeks and owning options has broadly been ineffective during this time.

DOE numbers singing the same bearish tune

U.S. crude inventories fell 2.3m bbls w/w due to a 2.5m bbl drop in PADD III. The PADD III decline came despite a 243k bpd w/w increase in imports into the region and was helped by a 191k bpd increase in refiner inputs near Houston. In the Cushing hub inventories added 189k bbls. Overall U.S. crude stocks are higher by 12% y/y while imports at 8.1m bpd are higher by 5.9% y/y over the last month. U.S. crude production increased for a 2nd straight week to 8.494m bpd due to gains in Alaska.

U.S. refiner inputs had a large w/w jump in inputs of 319k bpd bringing overall inputs to 16.86m bpd. PADD II (+114k bpd w/w) and PADD III (+191k bpd w/w) were the largest contributors. East coast inputs increased by 57k bpd but are still lower by 6% y/y. Overall inputs are flat y/y and remain challenged by abysmal crack margins in the northeast, Chicago, USGC and Europe. RBOB/Brent, WTI 321 and gasoil/Brent traded at $11/bbl, $13/bbl and $9/bbl, respectively.

RBOB futures made their lowest print since March on Wednesday at $1.3381/gl following the disappointing EIA numbers. By Thursday afternoon the prompt contract was near $1.36/gl for a 30 cent loss since May. Prompt RBOB spreads continued to signal a significantly oversupplied market despite their recent rebound trading at a contango of -0.70 cpg late in the week.

Gasoline inventories registered yet another w/w build due to an increase of 1.3m bbls in PADD II. Overall mogas stocks at 241m bbls are higher y/y by 11%, PADD IB stocks added nearly 1m bbls with help from a 23k bpd increase in imports into PADD I. East coast imports are higher y/y by 5.4% and overall imports are higher y/y by 8.9%. Domestic mogas demand jumped to 9.79m bpd and is +1% y/y.

Distillate inventories fell by 214k bbls w/w due to a 2.4m bbl draw out of PADD III. In PADD IB inventories fell by 26k bbls and are higher by 17% y/y. Overall distillate stocks are higher by 8% y/y. Distillate exports at 1.3m bpd are higher y/y by 6.3% while domestic demand is -0.7% y/y over the last month.

By SCS Commodities Corp. for Oilprice.com

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