Daily Oil Market Report - 2nd October 2018

Crude market finally takes a breather: After two consecutive days of exciting flat price action, today was a relatively dull day. Crude finished slightly lower but did well to hold on as the market tries to find a new trading range.

In European morning hours, Russia announced their new record high production for September. Their m-o-m gain was around 150KBD and almost 400KBD higher since the beginning of this year. What is more interesting is that Q4 is normally the strongest crude production season for Russia. In addition, their deputy energy minister (see link 1) said that Russia’s hard to recover oil production can increase by almost 10% or 860KBD in 2018. It’s hard to quantify depletion rates from legacy fields, but if there is any truth in the deputy energy minister there are big monthly gains to come in the next few months.

With crude markets gone up so quickly and in a straight direction, refiners have begun to feel the pain. The marginal refiners are in Europe and if margins get worse, they will be the first to cut or trim runs. 3-2-1 crack vs WTI doesn’t look that bad and is not reflective of the market due to the widening WTI-Brent arb. However, Forties margin against dated Brent have now hit YTD lows. In addition to the strong crude, weak light ends especially gasoline is causing weak margins for Europe (see chart of the day). As margins get worse, we will cover this in greater detail in the next few days. In the current environment, only gasoil strength or physical crude weakness can improve the margin in the short term.

Neutral Zone made headline yet again and Kuwait/Saudi are struggling to agree and bring almost 400kbd of much needed production online. This time the reason is that Kuwait don’t want Chevron to be part of the team anymore. Wonder what Chevron has done.

table 1.JPG

In non-oil news, metals had a good day. Copper gained over 1% despite low liquidity as China is on holiday. Most banks have very bullish Copper outlooks as they believe the current trade war threat is keeping copper depressed. Gold touched $1200 as the fears around Italian debt caused some jitters in the market. The Italian situation is still being under-priced in the market, however Euro/Dollar did hit a 6 weeks low.

table 2.JPG

CHART OF THE DAY

NWE Gasoline Crack: One of the reasons behind the European margin weakness. European gasoline cracks are now at seasonal low level since 2015. In addition, gasoline cracks struggled to spike at any point this year unlike the previous years. With no major hurricane or unexpected refinery outages in the US, US gasoline stocks are sitting at high levels which is depressing European gasoline. Until gasoline cracks remain depressed, Gasoil crack or crude weakness has to help carry the refining margin otherwise we will get run cuts very soon.

 Source: CME

Source: CME


 Not much change in Brent structure, but we are seeing weak WTI prompt spreads and strong deferred WTI spreads. The Dec/Dec box is finding new lows, trading almost down to -1.40 when it was over +$1 a few weeks ago. The strong Brent structure will hurt European refiners who will try to delay prompt crude purchases as much as possible.

Not much change in Brent structure, but we are seeing weak WTI prompt spreads and strong deferred WTI spreads. The Dec/Dec box is finding new lows, trading almost down to -1.40 when it was over +$1 a few weeks ago. The strong Brent structure will hurt European refiners who will try to delay prompt crude purchases as much as possible.


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