Daily Oil Market Report - 10th October 2018

Macro Risk-Off Day : The carnage in the global equity markets today dragged most asset classes along with it. S&P dropped over 3% to break through its 100 day moving average. This was the 5th consecutive down day for S&P. There is no clear reason behind the selloff but it dragged oil prices sharply down along with it. Brent closed down $1.91 lower but after API data, Brent was 50c further down at the time of writing.

Hurricane Michael made further headlines early on the day as it became a category 4 storm. Roughly 790KBD of production was shut in, but that didn’t stop the oil prices to keep tumbling. London was hosting the Oil and Money conference, where many of the commodity trading CEO’s made a very wide forecast for prices next year. Only Trafigura’s CEO was bullish from current levels while other trading houses saw prices revert back in the $65-$75 range as they see a well supplied physical market in 2019.

EIA Short Term Energy Outlook (STEO) was out today and not surprisingly their 2018 demand was cut by 60KBD due to emerging market worries. We wait for the IEA report to be out on Friday. EIA STEO raised their 2019 US production growth by 260KBD (y-o-y is now 1100KBD)

API data was very bearish for crude and gasoline as the stock builds exceeded expectations. Runs dropped by 366KBD due to higher refinery maintenance but that shouldn’t have led to a 9 million build. While for gasoline, these numbers came at the worst possible time as the market has gone maximum bearish and negative rubber cracks (RBOB v Brent) has become a possibility (see chart of the day).

table 1.JPG

A busy day for non-oil news with all major markets in the red. S&P broke through its 100 day moving average. In recent history, these have been great buying opportunities. However, this time with treasury yields hitting multi year highs, more money might be leaving the equity market and entering fixed income. Oil equities and mining companies’ share price got hammered along with the market and also with falling oil and copper prices. VIX was up 30% and it might remain elevated if fear has entered the market.

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CHART OF THE DAY

No hope for gasoline: Gasoline crack weakness continued today as prompt rubber cracks (Gasoline v Brent) dropped below $1. At this rate, negative gasoline cracks is a possibility, something we saw briefly in 2011/12. With such low gasoline cracks, US refiners will be trying their hardest to switch as much of their gasoline yield to distillates, given the distillates strength. 3 main reasons behind the current gasoline weakness:

1) Winter spec gasoline - refiners find this easy to make

2) Trump’s announcement on year round sales of 15% ethanol blend, causing gasoline demand destruction.

3) Positioning: a failed rally after the Irving refinery fire has caused the market to go maximum bearish on gasoline cracks.

 Source: CME

Source: CME


 The sharp drop in oil prices has weakened the backwardation structure along with it. Prompt WTI spreads fell but prompt Brent spreads held its ground. Deferred spreads were offered today, with some part of the WTI curve hitting 5c and very closing to entering contango.

The sharp drop in oil prices has weakened the backwardation structure along with it. Prompt WTI spreads fell but prompt Brent spreads held its ground. Deferred spreads were offered today, with some part of the WTI curve hitting 5c and very closing to entering contango.


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