Daily Oil Market Report - 3rd October 2018

This market can absorb all the negative headlines for now: You know that crude oil is in a bull market when it can absorb record production output from 3 countries and the largest US weekly crude stockbuild since March 2017.

Today, Saudi announced they are producing 10.7MMBD in October and plan to increase further in November. This will be a testing time for Saudi as their last peak was also 10.7MMBD in 2016. Russia’s Putin said that they can increase production by a further 200-300kbd in addition to the record output reported in September. Lastly, Libya’s NOC came up with a rather surprisingly headline that they are currently producing 1.25MMBD. If NOC are to be believed this will be Libya’s highest production since July 2013.

The next bearish headline came out with the weekly DOE statistics. No one was expecting an 8 mln stockbuild, bulk of the reason behind this stockbuild was the sharp drop in crude exports. Crude exports dropped by 917KBD which contributed 6.4mln build out of the total 8 million.

None of this mattered as flat price rallied after DOE stats to settle $1.49 higher to hit new 4 year highs. Refinery margins especially in Europe will continue to come under pressure as products will struggle to keep up with crude. Brent spreads are not keeping up pace in line with flat price which questions the physical strength behind this rally. As this rally is all supply led and not demand led, this flat price rally will always look fragile.

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In non-oil news, natural gas had a good day and hit 8 month highs on storage level fears before we hit winter. Metals had another good day as Aluminum spiked on fears of closure of one of the largest refinery of a key raw material in Brazil shut down. Dollar Index continued its upward trend, while Indian rupee hit a new low and this flat price rally will not be good news for the government, import deficit. and their oil demand growth The 10 year US treasury yield traded to the highest levels since July 2011 but that wasn’t enough to stop the stock market rally and risk on sentiment.

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CHART OF THE DAY

OPEC Member supply growth: Record production was flavor of the day. If Saudi and Libya’s October crude production are to believed then the October production has collectively increased 510KBD compared to their average Q3 production. Out of the 510KBD increase in October, 380KBD is from Libya. Sustaining this production will be hard for Libya given the ongoing violence, however these big increases will help cushion the loss of Iranian barrels.


 Prompt brent structure is actually weaker wk-on-wk despite the rally, but its the deferred spreads in Brent and WTI which keep on rallying. As producer hedging increases, the deferred spreads will get new buyers.

Prompt brent structure is actually weaker wk-on-wk despite the rally, but its the deferred spreads in Brent and WTI which keep on rallying. As producer hedging increases, the deferred spreads will get new buyers.


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