Daily Oil Market Report - 01st October 2018

$85 here we come: The first day of Q4 started on an explosive note with Brent and WTI rallying above $2. There was no obvious headline behind this rally but there was a tweet from the publication Energy Intel, that Saudi’s planned expansion of the 300kbd Khurais Oilfield has been delayed to the 2nd half the year.

Its very surprising that this tweet alone could have sparked such a rally, however it shows how nervous the market is about Saudi’s spare capacity. There is very little at the moment to stop the oil price momentum. The most obvious thing that can stop this rally is weakening refinery margins. Refinery margins has weakened significantly over the last 6 weeks in Northwest Europe and the Med. There has been no reported run refinery run cuts, however at this rate we should expected some refineries to trim their refinery runs which should weaken the physical crude market.

Even in Asia, margins have weakened due a very strong crude market in grades such as Dubai and ESPO. ESPO was heard to be traded at almost Dubai + $7.

Related to margins, Platts put out an article on Chinese crude export quotas for 2019 (see link 1). They have a quota of around 4 million barrels per day which is an increase of 42% y-o-y. If all this quota is used, there also has to be a huge jump in Chinese exports which is very bearish for margins globally.

table 1.JPG

In non-oil news, the new and improved NAFTA helped improve the macro sentiment. Stock market was up and metals should benefit in the near future if Trump can do a deal with China like he has done with Canada and Mexico.

The new NAFTA agreement might have an impact on the oil market due to the ‘proportionality clause’ (see link 2). This is because in the old NAFTA, Canada had to give a certain proportion of its exports to the US even if other regions in Canada wanted it during peak demand periods. This clause will now be removed and Canada isn’t forced to export to the US and can export to other markets or keep it domestically. The timing of this won’t be immediate but to put it very simply, this is bullish WTI-Brent when it finally gets approved.

table 2.JPG

CHART OF THE DAY

US Oil Demand: The Monthly PSM’s were out on Friday and once again the US product demand came out very healthy due to diesel demand. Diesel demand is up 7% YTD. The growing industry and the trucking demand has exceeded all expectations. On the other hand, gasoline demand has remained flat despite higher Vehicle Miles traveled and lower unemployment. If it wasn’t for diesel, US overall demand would have been flat y-o-y.

If US diesel demand growth continues like this next year and along with IMO, diesel markets will look very tight.

 Source: EIA

Source: EIA


 The high flat price hasn’t caused a spike in the prompt spreads yet, however the deferred spreads for WTI are rising which could be a sign of increasing producer hedging.

The high flat price hasn’t caused a spike in the prompt spreads yet, however the deferred spreads for WTI are rising which could be a sign of increasing producer hedging.


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