Oil market bulls have had an easy two and a half months to start the year as prices have trended steadily higher. Working in concert, OPEC+ production cuts, central bank easing and progress on a US/China trade deal have basically eliminated downside risk and added a healthy amount of upside risk. We’ve been largely optimistic on all three themes and continue to believe they will positively impact prices through the balance of 2019. In short, we see continued OPEC+ cuts near current levels, continued dovish signaling from the US Fed and a US/China trade deal that Mr. Trump can use to get momentum in the 2020 elections.
Unfortunately, we also keep getting this nagging feeling these positive themes have been priced in to the market and 2019 could be the ultimate year of ‘buy the rumor, sell the news’ even if substantially bullish macroeconomic, geopolitical and fundamental upside headlines come to fruition. While we aren’t turning bearish on oil, we continue to believe that the easy money has already been made from the long side and observed tepid reactions to positive news on all three key fronts this week which make us think that there will need to be significant bullish surprises in order to push oil prices north of the $75 mark.
Perhaps the best example we’ve seen of this in the last few trading sessions has been the reaction to OPEC+ production data. OPEC+ production data for February revealed increased will from the Saudis to tighten the market alongside increase political strain in Venezuela and Nigeria. The cartel’s production fell to its lowest level in four years. Unimpressed, oil has moved completely sideways on the news looking more concerned with the restart of a recently shuttered Libyan oil field.
On the macro side, central banks continue to tip their hand to more dovish coordinated action particularly from the US Fed, European Central Bank, People’s Bank of China and the Bank of Japan. While low rates and money printing are obviously still positive for commodity prices, we think it’s unlikely that we’ll see the sort of ‘macro turbo fuel’ we and other market participants saw earlier this year for the simple reason that if every other central bank prints money alongside the US Fed we may not see significantly US Dollar weakness. It’s highly notable for oil traders that the US Dollar Index is still higher on the year despite a relentlessly dovish Fed. This is yet another signal that markets will have to ratchet the headlines up a notch to push oil meaningfully higher.
As for US/China, US Secretary of State Mike Pompeo told a newspaper on Monday “it’s never over ‘til it’s over, but they’ve made a lot of progress, and so I’m very hopeful that in the coming days and weeks, there’ll be a significant announcement.” Both sides are still lobbing harsh rhetoric towards one another in the press and continue to negotiate hard, but markets seem clear in pricing in the expectation that both sides will make a deal at some point this year. Unfortunately, US/China tensions and Brexit are weighing tremendously on markets even if they are resolved in a positive manner and this is showing up in global GDP data. This week the Paris-based Organization for Economic Cooperation and Development cut their 2019 global GDP growth forecast from 1.8% to just 1.0% after growing at 3.9% in 2018 (according to the IMF.) Stock markets have also looked underwhelmed as a potential deal has progressed with S&Ps touching a three-week low on Wednesday.
As we look ahead, it’s important to remember that continued OPEC+ cuts, central bank easing and a US/China trade deal may not be enough to push the market substantially higher as traders have already priced in a decent amount of optimism on all three fronts.
- Global crude prices moved sideways yet again this week with Brent treading water near $65/bbl while WTI was flatlined near $56/bbl.
- Bloomberg’s OPEC production estimates for February have been released seeing the cartel’s output at 30.5m bpd representing a 560k bpd decline from January and a four-year low. Saudi output fell 100k bpd to 10.1m bpd, Venezuelan output fell 160k bpd to 1.07mbpd, Nigeria output fell 30k bpd to 1.76m bpd, Iranian output fell 90k bpd to 2.65m bpd and Iraqi production fell 70k bpd 4.62m bpd.
- Saudi leadership is signaling they remain committed to leading OPEC+ production cuts into the second half of 2019. Energy Minister Khalid Al-Falih commented last week that “all of the outlooks that I have seen tell us that we will continue, we’ll need to continue, to moderate production in the second half of the year.”
- On a more bearish note, Libya’s NOC lifted the force majeure placed on its 300k bpd Sharara field this week and expects to resume exports this weekend after a three-month stoppage.
- Emerging markets showed strain over the last week. India reported 4Q’18 GDP growth of 6.6% for its worst mark in five quarters. Factory activity shrank in China for a third straight month.
- Hedge funds continue to buy oil but current positioning is by no means historically aggressive. Money managers currently hold a net long in ICE Brent futures and options of 291k contracts and have accumulated a net long in NYMEX WTI futures and options of 130k contracts. Despite eight straight weeks of net buying fund net length is down by 54% from last spring in ICE Brent while length in NYMEX WTI is lower by 70%.
- Bloomberg reports that the US/China trade spat has led to a complete stoppage of Chinese imports of U.S. crude oil. In January ’18 China imported 2 million metric tons of U.S. crude. In January ’19 that number was 0.
- U.S. and Chinese trade officials continue to signal that progress is being made towards a trade deal but barriers to a pact remain.
- Equity markets continued to diverge this week with European and Shanghai shares moving higher while U.S. shares softened.
DOE Wrap Up
- U.S. crude output was flat w/w at 12.1m bpd. Production has averaged 11.9m bpd in 2019 after averaging 10.8m bpd in 2018 and 9.3m bpd in 2017.
- U.S. crude stocks increased 7m bbls w/w to 453m bbls. Overall crude stocks are +7% y/y.
- A spike in crude oil imports was largely responsible for the increase in inventories. U.S. refiners and traders imported 7m bpd representing a 1m bpd increase w/w. Crude imports have averaged 7.4m bpd over the last six months.
- U.S. crude exports fell to 2.8m bpd last week and have averaged 2.4m bpd over the last six months.
- Cushing crude oil inventories increased 873k bbls w/w to 47.5m bbls representing a 15-month high. WTI spreads have continued to fall further into contango as Cushing stocks have filled up over the last three months.
- The U.S. currently has 28.6 days of supply of crude oil which is +2 days y/y.
- U.S. refiner demand jumped 100k bpd to 15.99m bpd. Overall inputs are lower y/y by 110k bpd over the last four weeks.
- Good news for U.S. refiners- crack margins continue to improve with the WTI 321 crack moving to $22/bbl this week. The RBOB / WTI crack is currently $19/bbl while the Heating Oil / WTI crack is offering $28/bbl. In Europe the gasoil / brent crack is trading $17/bbl.
- U.S. gasoline stocks fell 4.2m bbls w/w/ to 251m bbls and are flat y/y over the last four weeks.
- U.S. gasoline demand + exports printed 9.97m bpd last week and is averaging 9.71m bpd so far in 2019 which is flat y/y.
- U.S. distillate stocks fell 2.4m bbls to 136m bbls and are -0.5% y/ over the last four-week period.