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Expert Commentary: The Long Road To Oil Market Balance


• WTI has traded in a narrow range this week ($52.42/$49.61) heading into tomorrow’s meeting between Russia, Azerbaijan, Kazakhstan, Oman and Mexico which could help determine whether or not OPEC receives non-member assistance in its effort to remove barrels from the market. The group will discuss cutting production by up to 600k bpd lead by Russia’s potential cut of 300k bpd. While we do not have a view on what the outcome of the meeting will be, we continue to see a medium-term range for WTI of $47-$55 regardless of the result and believe that any severe market reaction will likely be worth fading. The options market is taking a similarly unconcerned view of the meeting as evidenced by a continued breakdown in implied volatility and option premiums.

• U.S. data has taken a bearish turn over the last two weeks, which has disappointed us as believers in the idea that slowly improving fundamentals will keep a firm floor under the market in the high $40s. This week’s EIA report revealed a 3.8m bbl build in Cushing, bringing stocks in the hub to 65.3m bbl- their highest in four months. On the demand side U.S. refiner inputs at 16.4m bpd have also been disappointing and are now lower by 100k bpd y/y over the last four weeks. RBOB and Heating Oil inventories have also performed poorly on a seasonally adjusted basis with help from bearish turns in demand for both products. Overseas, OPEC added to concerns about the rebalance effort this week by pumping 34.16m bpd (Bloomberg estimate) in November for a 200k bpd m/m increase. As for money flows, the USO also suffered its largest weekly outflow since 2009 for the week ended December 2nd with $386m removed from the fund in a sign that real money may believe that the steep part of the oil rally may have already been realized.

• On a more positive note, we are still seeing signs of market performance in refined products abroad particularly in ARA Gasoil stocks which are now lower y/y by 28 percent. U.S. crude inventories are still 24m bbls lower than their May ’16 peak in contrast to 2015 when end of year inventories easily exceeded the spring peak. U.S. implied gasoline demand has also registered a respectable 3 percent y/y jump so far in 2016 (+280k bpd) with most sell side economists expecting similar growth in 2017. Lastly, elevated U.S. exports from Houston should also help ease inventory builds this winter as we’ve seen trading groups busily bidding up Midland-WTI to a 14-month high at +90 while adding to floating storage in the USGC.

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WTI M17/Z17- The Icarus of the WTI curve

WTI spreads came under considerable pressure this week, particularly in the front of the curve as Cushing stocks jumped over 65m bbls for the first time since July. There was some relief on the Cushing >Houston network, however, as trading groups moved as many as 7.6m bbls into USGC floating storage which helped lead to a 6.9m bbl draw in PADD III.

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The low print in the WTI m1-m2 spread this week was -1.19, which occurred on Wednesday following Cushing’s massive build. Further back in the curve WTI M17/Z17 corrected sharply lower after flying too close to the sun and printing 0.00 in the hours following OPEC’s bullish deal last week. While it seems highly likely that WTI spreads will flip into backwardation in 2017, the flat print for WTI M17/Z17 on December 1st was clearly premature opposite generally weak supply data in PADD II, PADD III and Cushing. The spread reached a weekly low of -0.65 on Thursday morning before rebounding to -0.45 later in the day.

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Diff markets maintained recent trends this week beginning with weak WTI-Brent arbs. The M17 contract sank to a two-month low at -1.68 Thursday morning, but we still expect 1h’17 arbs to find support in the -2.00 area due to export activity. To that point, Midland-WTI jumped to +90 on Thursday for a 14-month high driven by trade group buyers looking to send U.S. barrels to Asia. Further north the Bakken-WTI was steady near -2.40/bbl.

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U.S. producer data didn’t deviate from recent bearish trends. The rig count was +3 w/w to 477 while production was essentially unchanged at 8.697m bpd. Lower 48 production has been above 8.16m bpd for four straight weeks. WTI Cal ’17 and Cal ’18 swaps both moved slightly lower on the week towards $53.50 and $54.20, respectively. Last week’s WTI Cal ’17’s short lived print brought increased hedging into the market as evidenced by NYMEX COT data which showed an increase in the producer/merchant gross short of 26k contracts.

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Brent spreads followed a somewhat similar pattern this week with help from a 200k bpd m/m increase in OPEC production to 34.16m bpd (Bloomberg estimate) which obviously added to skepticism that the group will cut output to their 32.5m bpd target. Brent m1-m2 dropped to -0.82 on Thursday for a 2-week low while Brent M17/Z17 moved from its Dec 1st high of -0.31 back towards -0.54.

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Option premiums keep tumbling

Crude oil implied volatility continued to sink this week with the CBOE/NYMEX WTI vol index moving below 36 percent for the first time since October. As of Thursday WTI H17 50 delta vol moved down to 33.4 percent while 25 delta puts traded at 36.8 percent and 25 delta calls traded at 30.5 percent. 10 Delta ‘wingy’ calls continued to trade at a substantial discount to ATM options despite a generous amount of speculative call buying including a surge in OI in the WTI F17 $60 Call to over 100k contracts. Instead, the options skew was driven by producer hedging and the related flow from dealers who were extremely busy buying $45 and $50 puts this week while selling $55 and $60 calls through Cal ’17. Realized volatility (20-day basis) still measure +50 percent, but our rangebound view of flat price means that we do not view implied vols in the mid-30 percent area as cheap. Related: BP CEO Dudley: We’ll Double Our North Sea Oil Production By 2020

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USO sees biggest week of selling since 2009

Managed money COT data for last week was unremarkable, with slight upticks in net length in both NYMEX WTI and ICE Brent. Funds were net buys of NYMEX WTI for 1k contracts bring net length higher by 19 percent over the last four weeks. ICE Brent net length increased by 17k last week bringing the long position to 310k for a 7 percent increase over the last four weeks. On the short side, speculators cut bearish positions in WTI and Brent by 10 percent 15 percent w/w, respectively.

Speculator positioning was slightly more bullish in refined products last week with funds increasing their net length in RBOB to 22k contracts while also being net buyers of Heating Oil to the tune of 6k contracts bringing net length to 9k. In ETFs, the USO experienced net outflows of $386m for the week ended December 2nd which was its largest weekly liquidation since 2009.

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EIA dissapoints for second straight week

• Wednesday’s EIA report was lowlighted by a 2.5m bbl build in Cushing, bringing the hub’s inventory to 65.3m bbls- its highest level in three months’

• The increase in refiner demand to 16.4m bpd was smaller than expected and lower y/y by 300k bpd

• Gasoline stocks also added 3.4m bbls and are now higher y/y by 5.5 percent. Distillate stocks added 2.5m bbls and are higher y/y by 4.9 percent

• Demand for gasoline and distillates was also dissapointing

U.S. crude oil stocks drew 2.4m bbls w/w and are now higher y/y by 7 percent. Unfortunately, the overall draw failed to produce a bid in the market as its driver- PADD III’s 6.9m bbl draw- was driven by a move into USGC floating storage and didn’t represent any sort of fundamental improvement in the region. PADD II crude stocks added 2.5m bbls (+5 percent y/y) while PADD III’s draw put the region’s supplies +11 percent y/y. Imports increased w/w to 8.3m bpd (+6 percent y/y) due to increased barrels into the east coast and PADD II.


The demand side of this week’s stats was also disappointing with overall U.S. refiner inputs climbing 134k bpd to 16.4m bpd. Unfortunately, overall demand is now lower y/y by 1 percent and a full 400k bpd shy of last year’s December peak in demand. Refining margins were mostly flat this week with the WTI 321 crack near $15/bbl, while LLS 321 crack traded $9/bbl. Overseas, the gasoil/brent crack traded near $10.50/bbl. Related: Did Big Oil Layoff Too Many Workers Too Quickly?

Gasoline stats were also bearish for a second straight week lead by a 1.5m bbl inventory build in PADD IB bringing stocks in the region higher by 14 percent. Overall stocks added 3.4m bbls and are higher y/y by 5.5 percent with help from a 826k bbl build in PADD II (-1.5 percent y/y) and a 1m bbl build in PADD V (+3.4 percent y/y.) Demand took a very disappointing w/w decline of about 200k bpd after domestic demand fell by 323k bpd to 8.76m bpd (-7 percent y/y) while domestic demand jumped 113k bpd to 992k bpd (+61 percent y/y.)

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RBOB touched a weekly high of $1.58/gl on Monday before losing 8 cents and printing $1.50/gl by Thursday. Spread markets also suffered from profit taking following Wednesday’s poor EIA report with M17/Z17 moving from a peak of +24 cpg to +22 cpg.

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U.S. distillate stocks did their part in the bearish stats report by adding 2.5m bbls w/w putting inventories higher y/y by 4.9 percent. PADD IB inventories were basically flat y/y (+7 percent y/y) while PADD II stocks and PADD III stocks both added about 750k bbls. Distillate demand also continued to trend bearishly with domestic demand falling 137k bpd 3.7m bpd. Exports at 1.1m are lower y/y by 14 percent.

Heating oil futures rode the OPEC momentum to new 14-month highs this week touching a high of $1.68/gl on Monday before Wednesday’s abysmal stat report forced a correction towards $1.62/gl. Spread markets acted similarly with substantial profit taking from recent long positions. HO M17/Z17 traded down to -5.40 on Thursday for a 1 cpg loss on the month.

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Overseas product data this week included more bullish flows in ARA gasoil stocks which declined by 6 percent w/w and are lower by 28 percent y/y. In a strong sign, ARA gasoil stocks are now matching their lowest point in 2015. ARA fuel oil stocks jumped 17 percent w/w but are still lower by about 25 percent y/y. Further east, Singapore’s distillate inventories fell by 2.2m bbls w/w and are now lower y/y by 4 percent.

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By SCS Commodities

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  • Jack Ma on December 10 2016 said:
    The EIA is a globalist puppet and their numbers are really just paper oil near 400 million barrels and designed to drive down process to destroy Russia and other BRICS that are refusing the dollar and USA hegemony. These lies of paper oil did not collapse Russia like 20 years ago and the cap ex reductions means a massive oil shortage in two years. IMHO

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