This week in oil is all about last week. Which is to say, the main force pushing markets is still the digestion of Trump’s surprise move to end Iran’s waiver program with a goal of pushing Iranian exports to 0 bpd come May 2nd.
So far, Trump seems to be getting what he wants in the deal in the form of strict sanctions on Iran and moderate oil prices. After an initial price spike north of $75 towards the end of last week, the President was able to push the market lower with a string of tweets highlighting the cooperative efforts between the White House and OPEC to maintain the currently well supplied state of the market.
We’re still at least a little bit skeptical that the President and his state department are accurately judging the current state of the oil market and the willingness of the Saudis to help him keep gasoline prices where American voters want them. On the fundamental front, yes, global oil markets are still reasonably well supplied. This is in part due to the monstrous production efforts coming out of West Texas which is keeping oil inventories above seasonal norms. The US currently has 28.5 Days of Supply of crude oil, which is 0.3 days above its 5yr seasonal average for late April - early May. This is a meaningful indication that oil markets have a reasonable level of cushion against upside shocks. Unfortunately for Mr. Trump, hedge fund managers and physical traders have a substantially more bullish opinion of where market fundamentals…
This week in oil is all about last week. Which is to say, the main force pushing markets is still the digestion of Trump’s surprise move to end Iran’s waiver program with a goal of pushing Iranian exports to 0 bpd come May 2nd.
So far, Trump seems to be getting what he wants in the deal in the form of strict sanctions on Iran and moderate oil prices. After an initial price spike north of $75 towards the end of last week, the President was able to push the market lower with a string of tweets highlighting the cooperative efforts between the White House and OPEC to maintain the currently well supplied state of the market.
We’re still at least a little bit skeptical that the President and his state department are accurately judging the current state of the oil market and the willingness of the Saudis to help him keep gasoline prices where American voters want them. On the fundamental front, yes, global oil markets are still reasonably well supplied. This is in part due to the monstrous production efforts coming out of West Texas which is keeping oil inventories above seasonal norms. The US currently has 28.5 Days of Supply of crude oil, which is 0.3 days above its 5yr seasonal average for late April - early May. This is a meaningful indication that oil markets have a reasonable level of cushion against upside shocks. Unfortunately for Mr. Trump, hedge fund managers and physical traders have a substantially more bullish opinion of where market fundamentals are headed in the near term.
On the hedge fund side, speculators appear increasingly confident in the upward momentum of prices. Net length in NYMEXW TI and ICE Brent contracts has nearly tripled in 2019 moving from 265k contracts in early January to more than 710k contracts at present. A similar trend is occurring in NYMEX gasoline futures with RBOB net length held by managed money moving from 47k contracts in early February to more than 112k towards the end of April.
As for physical traders, time spreads and diffs have maintained their recent gains this week implying strong draws out of crude oil and gasoline stocks this summer. The Brent June / December delivery spread continued to trade near $3.00/bbl this week while the US Gasoline June / December delivery spread traded +30 cents per gallon with both marks representing contract-highs. This clearly suggests that those who are responsible for buying physical crude oil and gasoline are looking at the unplanned outages in Libya, Nigeria and Venezuela compounded by the planned cuts from OPEC+ and deepened Iranian sanctions and see reason to be nervous. We don’t blame them.
Looking ahead, we expect the Trump administration to fully implement the Iranian sanctions in the coming days. We also expect to see Saudi Arabia and the UAE to make some symbolic production increases but not enough to plug the void left by lost Iranian barrels. A recent Bloomberg analysis concluded the Saudis still need $85/bbl oil in 2019 to balance their budget, and 2018’s Trump/Saudi debacle will lessen the desire of MBS and others to rush to help Trump keep oil prices low. Decreased Iranian exports and a lack of will from the Saudis to keep oil under $80/bbl could tilt prices slightly higher in the coming weeks.
Quick Hits
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- Oil flattened out near $72/bbl this week with several key headlines pushing prices in both directions. On the bullish side, US waivers on large Iranian crude buyers are set to expire on May 2nd. Meanwhile the threat of Venezuela plunging deeper in chaos increased and reports surfaced of contaminated Russian exports into eastern European markets which could have a short-term impact on Russian flows. The Saudi Energy Minister signaled on Tuesday that OPEC+ will probably pursue supply cuts through the end of 2019. On the bearish side, President Trump was effective in pushing prices lower via his Twitter account claiming OPEC would help keep markets well supplied.
- Venezuela’s Juan Guaido upped his rhetoric this week in calling for the end of Maduro’s regime (the military is sticking with Maduro for now.) PDVSA officials assured markets that political shifts would not interrupt oil production, but traders appear skeptical via rallying Brent spreads.
- Canada’s oil sands are entering maintenance season in the coming months which could finally drain the glut of crude oil in Western Canada. WCS crude is currently trading at a $14/bbl discount to WTI in the swap market. The prompt WTI 6-month spread has dropped from +1.62 to +0.72 over the last weeks with help from ample stocks in Cushing.
- US gasoline spreads continue to scream higher in a bright spot for fundamentals. The RBOB contract for June delivery is currently trading at a 30-cent premium to the December delivery contract.
- Warren Buffett entered the high-profile bidding war for Anadarko this week adding support to Occidental’s bid, which is currently higher than the deal the board has already approved with Chevron. Occidental share prices sank more than 4% on the news with shareholders fearing the company was overpaying for Anadarko’s prized West Texas acreage.
- BP CEO Bob Dudley gave an interview to Bloomberg Television this week and forecast oil prices in a $60-$75 range for the rest of 2019 adding “fundamentally the markets are tight this year.”
- Bond markets are back to rallying this week as President Trump upped his anti-Fed rhetoric and called for interest rate decreases from the US central bank. The interest rate on the US 10yr bond fell from 2.6% to 2.5%.
DOE Wrap Up
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- US crude production moved higher by 100k bpd w/w back to its all-time high of 12.2m bpd.
- US crude stocks jumped by 5.5m bbls w/w to 461m and are higher y/y by 7% over the last month.
- A surge in imports was partly to blame for the larger than expected w/w build. US traders imported 7.1m bpd of crude last week for a w/w increase of about 1.2m bpd.
- Exports increased slightly moving from 2.4m bpd to 2.68m bpd.
- Crude inventories in the Cushing delivery hub also jumped higher moving from 44.4m bbls to 44.9m bbls. WTI spreads continued to rally nevertheless, suggesting reasonably tight fundamentals and large inventory draws are on the way this summer.
- The US currently has 28.5 days of crude oil supply on hand which is higher by more than 10% y/y.
- Refiner demand moved sharply higher- 505k bpd w/w to be exact- to 16.58m bpd. Unfortunately, refiner runs have still just averaged 16.15m bpd over the last four weeks which is lower y/y by more than 700k bpd. As for margins, the WTI 321 crack traded near $22/bbl this week.
- US gasoline stocks fell 2m bbls to 226m and are lower y/y by about 3%.
- On a more bearish note, US gasoline demand + exports continue to disappoint printing 9.96m bpd last week. Total demand has averaged 10.05m bpd over the last four weeks which is lower y/y/ by about 100k bpd.
- US distillate inventories fell by 600k bbls w/w to 127m and are higher y/y/ by about 1%.
