Daily Oil Market Report - 4th October 2018

What goes up, must come down: Crude oil prices reversed all the gains that they had made on Wednesday. There was no significant bearish headline, may be the market was playing catch up to yesterday’s supply-increase headlines and the large DOE stock build.

WTI prices fell a lot harder than Brent, with the front arb widening out to -10.25. Despite these negative arbs, current investment banking consensus is that this spread can go down further to -$15. Prompt WTI spreads were hit alongside flat price. Nov/Dec was down 7c to reach 10c. Backwardation is slowly evaporating away in the prompt WTI spreads. One of the reasons behind the sharp drop in WTI prompt spreads was an unknown refinery outage in Tulsa refinery which is connected to Cushing. The outage duration remains unknown.

India’s finance minister made headlines today by announcing a cut in tax on petrol and diesel by 1.5 rupees/litre. This is an almost 2% cut, where retail prices in Delhi have reached 84 rupees/litre. This shows that governments battling runaway retail prices have very little power and cutting taxes is the last resort left, to appease popular dissent. Some of this tax cut will be absorbed by Indian state refiners and as a result of this announcement, share prices in Indian refineries like IOC, HPCL and BPCL fell very sharply. This might increase the possibility that Indian refiners might be more lenient in accepting Iranian barrels but its still very early to say.

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In non-oil news, stock markets weakened due to trade war fears and rising bond yields. Copper fell almost 2%, but we should expect more copper headlines next week when LME week starts in London. VIX index finally made some double digit gains, making its biggest daily move in over 3 months.

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Iraqi crude production and new government: Barham Salih, a Kurd, was elected Iraq’s new president recently. There is now momentum to form a government in Iraq and, finally, settle a revenue sharing deal with KRG. Doing a deal with KRG will never be easy, but if successful that will provide at least 200 KBD of much needed extra crude. Companies like Genel, Gulf Keystone and DNO will be big beneficiaries, if the dispute between SOMO and KRG comes to an end.

 Source: JODI and OILytics’ estimates

Source: JODI and OILytics’ estimates

 Prompt WTI structure has weakened significantly and is at risk of entering into contango.

Prompt WTI structure has weakened significantly and is at risk of entering into contango.

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