Oil Markets On Edge Awaiting Yellen's Speech

With broader markets distracted by an impending speech by Federal Reserve Chair Janet Yellen, crude is once again preoccupied by potential OPEC developments. As the dollar softens and crude edges higher, hark - here are five things to consider in oil markets today.

1) Ecuador President Rafael Correa met with Iran's Foreign Minister Javad Zarif yesterday, apparently to discuss oil prices. While Iran continues to try and muscle its way back into the global oil market, Ecuador is much more aligned with Venezuela in consistently calling for a production freeze amid steady domestic production of ~550,000 barrels per day.

Ecuador is OPEC's third smallest producer, ahead of rookie Gabon and problem-plagued Libya. It exports two key grades, Oriente and Napo, with the U.S. the leading recipient, accounting for ~55 percent of crude exports. Peru and Panama account for the majority of the remaining exports, with a number of other countries vying for much smaller volumes. 

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2) Both IEA and OPEC data in recent months indicate that Iran's oil production appears to have stalled. We see a similar theme in our ClipperData; after loadings reached 2.6 million barrels per day in May, we have seen them holding below this for the past three months. We have also seen Iranian floating storage at Asaloyeh drop off in recent months too.

Even though Iran has exported crude to ten different European countries since the lifting of sanctions at the beginning of the year, it is still struggling to navigate payments through certain banks given ongoing U.S. sanctions. In addition to this, an ongoing lack of foreign investment is also seen hindering production, ergo exports.

Falling short of its production target of 4 million barrels per day casts further uncertainty on Iran's involvement in a production freeze, something they were completely unwilling to entertain in April.

3) As crack spreads remain in check amid elevated product inventories, refiners are about to let the wild rumpus start, with refinery runs set to tumble as we head into maintenance season. Lower comparative cracks to last year as we exit summer driving season are set to encourage a solid bout of refinery maintenance, leading to rising crude inventories once more. The latest EIA weekly report yielded a drop in refinery runs last week; this trend is set to continue, as is the seasonal wont:

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4) The chart below is from EIA's 'This Week in Petroleum', highlighting the convergence of refinery earnings in the last year. North American 'earnings per barrel processed' has dropped in recent years as WTI has aligned itself closer to global benchmarks with the building out of pipeline infrastructure (to alleviate Cushing), as well as the lifting of the U.S. crude export ban.

On the flipside, European earnings have improved, likely boosted by increased efficiencies, while also experiencing the benefit of preferential pricing (from the likes of Russia, Iran, Iraq) amid a global market share battle.

5) We discussed earlier in the week how Chinese crude production has fallen to its lowest level since October 2011 last month, amid cost-cutting by its leading domestic producers. These companies have now released their quarterly earnings, and both were as poor as feared. Both posted their weakest earnings since being publicly listed, as Petrochina's capital expenditures fell 17.5 percent in the first half of the year, while Cnooc's fell by 33 percent.

Petrochina and Cnooc account for about 70 percent of Chinese oil production, and as revenues shrink with lower investment, their production is falling:

By Matt Smith

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