-WTI traded in an unusually narrow $48.75/$47.03 range this week despite an extreme weather event in the world’s refining hub and geopolitical tensions in from MENA to DC.
- In geopolitics we continue to see storm clouds over OPEC producers. Venezuelan credit moved sharply lower this week after the US banned trading in the country’s government bonds as well as PDVSA debt. RBC also authored a note discussing a potential PDVSA default in October or November. While any scenario for decreased output in Venezuela is hard to quantify, it’s becoming easier to accept that the most likely path for Venezuelan production is lower. We also saw more disruptions in Libya this week which failed to make a material dent in supplies but provide an important reminder that their supply gains have climbed a slippery slope in a politically volatile country.
- Away from the oil market currency, bond and equity traders are increasingly concerned about the worsening White House drama. Trump’s Tuesday speech and subsequent Tweets seemingly heightened the odds of a government shutdown and debt ceiling whiff by engaging congress (and specifically attacking House and Senate leaders) in a game of chicken over the building of the Mexican border wall. Treasury Secretary Mnuchin believes that he will not be able to pay all of the government’s bills on September 29th without an increase and this week’s theater lead to a weakening of front end US Treasuries vs. longer maturities. While US political turmoil can obviously shift bond and currency markets as they did in 2011, our view is that the fundamental underpinnings of the sideways market in crude remain extremely strong and we would look to fade any drastic macro shifts that moved oil markets via short-vol strategies.
- Despite the weather events, central bank events, geopolitical turmoil and inventory draws taking place this week that main story to us on crude is still the painfully sideways price action. We marked WTI V17 vol below 26% at one point this week representing a 4-month low in prompt WTI implied vol. WTI has achieved just a $3.97 range in August after trading in a $6.76 range in July. Option traders continued to bet aggressively on a sideways market this week by selling $45/$50/$55 iron flys in H18-M18 maturities.
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Harvey pushes WTI spreads lower
WTI m1-m2 moved sharply lower this week on concerns that USGC refinery outages would move more barrels into Cushing. On Friday morning the spread submitted a weekly low of -28 for an 18 cent loss on the week but recovered to the -25 area suggesting that traders don’t think expect a life-altering event for crude stocks. WTI-Brent arbs also continued to dive bomb and the Z17 contract fell to a low of -3.89 for a loss of about $1 over the last two weeks. CSO flows were largely short-vol this week with several funds and trading groups looking to liquidate length in 4q17 puts and add new short-straddle positions in 4Q17 on the -15 strike. Related: Kurdish Independence Could Deal A Major Blow To Oil Markets
For US producers we saw a continuation of the same trends this week- higher output, a stale rig count and increased hedging. US crude production enjoyed a small w/w increase last week to 9.53m bpd representing a 25-month high despite continued flattening in the rig count. US rigs have increased by 16 over the last ten weeks after jumping by 69 in the previous ten week period. Hedging has been muted in the North American market with NYMEX WTI producer/merchant gross shorts -7% over the last five weeks. However, ICE BRENT has seen increased hedging on recent market strength and has jumped 15% over the last six weeks.
Option vols sink to four month low
Crude option implied volatility continue to shift lower this week and prompt vol in WTI dropped below 26% for the first time since April. Short-vol strategies remain popular and there was continued fund selling of $45-$50 strikes opposite wing buying in Z17 through H18. As of Thursday afternoon WIT V17 atm vol traded 26.5% while 25d calls implied 27.5% and 25 delta puts implied 28.5%. 20-day realized volatility sank to 24% due to continued sideways price action and away from the oil market politics drove vol higher with the VIX trading in a 11.5-12.5 range.
Fund net length doubles over the last eight weeks
Hedge funds were net sellers of NYMEX WTI last week for small volume and were net buyers of ICE BRENT for 18k contracts. Combined net length between the two contracts stands at 693k contracts which is +108% over the last eight weeks. The combined net length of 693k contracts is 34% above its two year average which in our view is not large enough to be susceptible to some sort of violent short cover on a market correction. On the short side, combined fund gross shorts stand at 149k contracts which is lower by 58% over the last eight weeks and 25% below its two year average.
In refined products funds were net sellers of NYMEX RBOB by about 8k contracts reducing net length by about 17% and added to net length in Heating Oil to the tune of 7k contracts for an increase of about 30%. The USO saw weekly inflows after six straight weeks of selling with a net buy of $92 million on the week.
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Cushing stocks slowly increasing
• US crude stocks fell 3.3m bbls last week and are lower y/y by 6%
• The headline draw (which came despite a large import number) is obviously continued evidence of market performance but headwinds remain in the form of increased US production, Cushing stocks which have been basically flat over the last five weeks and mixed product data Related: Oil Prices Rise As Texas Braces For Hurricane Harvey Landfall
US crude inventories fell to a 20-month low last week at 463m bbls following a 3.3m bbl w/w decline. Overall crude stocks are -6% y/y. Regionally, PADD I stocks are -14% y/y, PADD II stocks are 03% y/y, PADD III stocks are -7% and PADD V inventories are lower y/y by 6.5%. As for trading flows there was a massive jump in USGC imports this week and with PADD III taking 3.4m bpd. Overall imports at 8.8m bpd are lower y/y by 3% over the last month with PADD II imports +8% and PADD III imports -16%. Crude exports also jumped to 936k bpd and are +19% y/y.
US refiner inputs printed 17.5m bpd last week and are higher y/y by 4.5% over the last month. On a regional basis PADD I runs are +4.7% y/y, PADD II runs are +4.3% y/y, PADD III runs are +4.9% y/y and PADD V runs are +2% y/y. Refinery utilization is currently 95.4% and +3% y/y. US refining margins shot higher late in the week as hurricane threats increased with LLS 321 rallying from $12/bbl to $13/bbl. The WTI 321 crack traded near $18/bbl late in the week and in overseas markets the gasoil/brent crack rallied to $12.50/bbl.
US gasoline data was more bullish than expected beginning with a 1.2m bbl draw. Overall gasoline stocks are currently lower y/y by 1% at 230m bbls. PADD I gasoline stocks fell 1.8m bbls this week and are -9% y/y while PADD II inventories jumped to +9% y/y and PADD III stocks fell slightly to +5% y/y. Gasoline production saw a sharp w/w jump of 518k bpd to 10.6m bpd and is +5% y/y over the last month. Gasoline exports printed 700k bpd last week and are +53% y/y while domestic consumption at 9.6m bpd is flat y/y.
US distillate stocks were flat w/w and continued to move into a more aggressive y/y deficit. Overall US distillate inventories are -3% y/y, PADD IB stocks are -11% y/y, PADD II inventories are +4.7% y/y and PADD III stocks are 8% y/y. Distillate production is running 5.1m bpd and is +5% y/y. As for demand, domestic consumption is currently 4.1m bpd and +7.6% y/y over the last month. Distillate exports printed 1.1m bpd and are -10% y/y.
By SCS Commodities Corp.
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