- Harvey dominated trading this week with downside blowouts in WTI time spreads and WTI/Brent arbs while product spreads and crack margins spiked to multi year highs. Consensus estimates saw 4.0-4.4m bpd of refiner capacity taken offline while oil production outages totaled less than 1 million bpd.
- Refinery outages in PADD III have upended global trading flows leading to a surge in clean product shipments from Europe and Asia toward the US while more than 29 million bbls of crude idled in the USGC due to the port closure. The Houston > east coast Colonial pipeline was forced to shut its main diesel line on Wednesday and planned to shut its gasoline line yesterday reducing substantial product flows to key markets. Motiva estimated that their 603k bpd Port Arthur refinery (the US’s largest) would be shut for up to two weeks.
- Citi, ING and Goldman all argued that WTI/Brent arbs could continue to decline as flooding in the USGC persisted and prompt WTI and product spreads revealed massive stress against existing storage and delivery demands in the coming weeks. In terms of time frame for a market recovery, however, the WTI F18/J18 spread yielding 20 cents / month of contango implies that traders are looking for a tight market to reappear in the coming months. Flat price’s aggressive bounce off of the $45.58 low opposite a crash in implied option volatility back towards 26% suggested a high degree of confidence that the range bound flat price environment will persist.
- August production predictions for OPEC are rolling out starting today with JBC Energy’s estimate that the cartel’s output fell 300k bpd m/m to 32.6 million bpd. Libya lead the m/m drop with a 160k bpd decrease to 840k bpd and Bloomberg estimates from this week put their production at 600k bpd following Hamada field disruptions (the field should be running again by Monday.) Saudi Arabia decreased output by 30k bpd to 10.05 million bpd in August and overall group adherence with cut targets increased from 86% in July to 96%. In geopolitics the IAEA reported that Iran was compliant with their quarterly nuclear deal audit.
- Away from the oil market the EUR/USD hit a +2.5yr high over 1.20 with help from US political dysfunction (ie lower tax cut / infrastructure odds) and economic strength in the Eurozone. US economic data was much more positive than expected this week including a +237k print for m/m job gains for August via ADP and 2q17 GDP revision from +2.7% y/y to +3.0% y/y. Nevertheless traders in Fed fund futures continue to see limited odds of a rate hike later this year placing 36% odds of a 25bp increase in December.
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Harvey hits brent spreads but inventory draws and Libya outages remain bullish
Prompt brent spreads were also hit hard this week as the Port of Houston’s closing diverted shipments from the US Gulf Coast and global refining inputs fell by roughly the size of Japan’s daily crude demand. The weakness in spreads came despite a continued drop in global floating supplies to 150m bbls for an eight month low and continued supply disruptions in Libya where output has declined by roughly 350k bpd m/m to near 600k bpd (via Bloomberg.) On a more bearish note global refined product stocks remain stubbornly high near 76m bbls which is unchanged on the year and unchanged y/y.
Late in the week Brent V17/X17 submitted a low of 40 cents contango for a drop of 90 cents in just 48 hours. The stress in the front of the curve was obviously due to USGC refiner outages while Brent F18/J18 traded -29 cents (-40 cents over the last two weeks) revealed only a modest amount of expected stress on the curve in the coming months. In diff markets dated brent also held relatively firm to the 1-month swap suggesting fairly resilient brent fundamentals. Related: Oil Markets React Stoically To Strong Crude Inventory Draw
US producer data for last week began with a small w/w decline in the rig count to 759. Over the last twenty weeks US crude rigs have increased by 76 marking a sharp decline from the previous twenty week period where they increased by 198 rigs. Production had a small w/w increase to 9.53m bpd for a 25-month high and is within 80k bpd of its all time high in June 2015. As for positioning, COT data revealed decreased short positions in NYMEX WTI and ICE Brent of 23k and 74k, respectively.
Option values move (a little bit) higher
Crude options were unsurprisingly firmer this week as flat price dropped to a five week low and Harvey sewed stress across the market. As of Thursday morning we saw WTI V17 at the money options running near 27% after reaching 30% early in the week. Mostly we think it’s important to note that the level of implied vol in the market was fairly muted on a historical basis given that more than 4m bpd of demand has been removed for an unknown period. If anything we think the takeaway from options market this week with vols running 26%-30% is that confidence in the range bound nature of the market remains extremely high. The confidence seems justified for now by 20-day historical vol printing a painfully low 25% on Wednesday.
Fund flows still uninspired
Hedge fund flows were muted last week and continue to show only a slightly positive attitude towards crude oil and refined products. NYMEX WTI saw a net sell effort last week of about 21k contracts bring net length to 253k contracts and 25% above its 2yr average. ICE Brent saw a net sell of 1k contracts w/w bringing net length to 418k contracts and 32% above its 2yr average. ICE Brent and NYMEX WTI had a combined increase in gross short positions of 11k on the week meaning that a small amount of bearish interest entered the market alongside modest length liquidation.
Refined product flows joined the slightly bearish trend last week with small net sell efforts in RBOB and Heating Oil. RBOB net length was cut from 40k to 37k while Heating Oil net length was cut from 32k to 20k. In ETFs the USO saw its second straight week of small buying- this time for $26 million.
EIA data continues bullish trends
• This week’s numbers were obviously overshadowed by Harvey developments but they continue to reveal strong crude demand, decreased PADD III imports and sharp inventory draws
• Refiner demand showed a record high print at 17.73m bpd and is +5% y/y
• On the bearish side we continue to see evidence of increasing Cushing stocks and US crude production gains which remind us of the limitations of WTI strength
(Click to enlarge) Related: Texas Shale Hit Hard By Hurricane Harvey
US crude inventories fell 5.4m bbls w/w and at 458m bbls are now lower y/y by 7.6%. By region, PADD I inventories are lower y/y by 18%, PADD II stocks are -3% y/y, PADD III inventories are lower y/y by 10% and PADD V stocks are -6% y/y. US crude imports continue to surge into PADD II and at 2.6m bpd are +6% y/y while USGC imports are -19% y/y on decreased OPEC allocations. Exports added to the bullish trend in stats printing 900k bpd and are +26% y/y but production continued to increase notching 9.53m bpd.
Refiner demand continued to highlight EIAs this week with a record high print of 17.3m bpd. Demand is still strong across regional lines with PADD I inputs +5% y/y, PADD II inputs +6.4%, PADD III inputs +5.5% and PADD V inputs +1.6% y/y. Utilization reached 96.6% which is higher y/y by 3.4%. Refining margins increased dramatically this week due to Harvey with gasoil/brent trading to a 2yr high at $16.00/bbl while WTI 321 traded to a 2yr high at $27.50/bbl.
US gasoline stocks were basically flat w/w and are lower y/y by 1%. Regionally, PADD I stocks are -7% y/y, PADD II stocks are +5% y/y, PADD III stocks are +5% y/y and PADD V inventories are lower y/y by 12%. In the mid Atlantic PADD IB inventories continue to tighten and are lower y/y by 15%. Gasoline production printed 10.6m bpd and is +6% y/y. On the demand side domestic gasoline consumption is higher y/y by 3.5% following a 9.8m bpd print while exports at 737k bpd are higher y/y by 34%.
US distillate supplies added 748k bbls w/w and are lower y/y by 3.6%. PADD IB supplies fell 582k bbls and are -14% y/y, PADD II stocks jumped 774k bbls and are +5% y/y and PADD III inventories increased 240k bbls to +11% y/y. Distillate production is currently 5.1m bpd and is +1.6% y/y. Exports printed 1.1m bpd last week and are +7% y/y while domestic distillate demand at 3.9m bpd is +2% y/y.
By SCS Commodities Corp.
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