Daily Oil Market Report - 12th October 2018

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Saudi Sanctions? : After 2 days of sharp macro sell-offs, the third day provided some relief as the “buy the dip” crowd came into action which led to the S&P close 1.4% higher. Oil prices were modestly higher. S&P 500 finished the week sitting on its 200 day moving average. S&P and Oil prices both fell over 4% over the week. However, oil prices are still far away from the 200 day MA. The 50 DMA and 200 DMA for Brent is at 77.98 and 73.36 respectively.

Interesting developments took over the weekend with further international condemnation taking place at Saudi Arabia. There were talks of US sanctions if indeed the journalist Khashoggi was killed by the Saudi government. Saudi stock market fell 7% at the open and all YTD gains have now been wiped out. Saudi has warned any sanctions can lead to high oil prices. Saudi has normally been one of the most stable forces in Middle East and this is now a very interesting new development which needs to be watched very carefully. US imports of Saudi crude this year are at 810KBD (2017 avg was 958 KBD) and its difficult to see US impose any sanction on oil imports.

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On Friday morning, IEA presented a very bearish monthly report. They revised their global demand by 110KBD. This is a pretty big deal for IEA as they have kept the demand forecast unchanged for the past 5 months. This downward revision to 1.29MMBD so late in the year means their 2018 balances shows stock builds for the whole of 2018. Bulk of the downward revision in demand has come from non-OECD countries as data from OECD countries has shown decent growth so far. It is bad data from China which makes IEA’s numbers very hard to verify.

IEA’s data on OECD countries show crude draws this year so far, however their data on product stocks is worrying. The rapid buildup in the last 3 months should make refiners worry. The decrease in Non-OECD demand growth can lead to weak margins for a while.

 Source: IEA OMR

Source: IEA OMR

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In non oil, the stock market losses finally stopped. Most of the rally took place after European markets closed. FTSE 100 closed below 7000 for the first time in almost 7 months. Otherwise the rest of the markets were quite on Friday.

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CHART OF THE DAY

European Product cracks - diverging fundamentals: Last week’s gasoline price weakness has cause a lot of worry for European refiners and US East Coast refiners. Refinery run cuts are becoming more likely as the gasoline crack continues to make new seasonal lows. However, diesel cracks continued strength has helped to offset some of this margin weakness. As some European refineries can produce almost 50% diesel, this crack strength will help their margins stay positive despite weak gasoline and the crude rally in the past month. European diesel is performing strongly despite the record low Rhine water levels which has subdued short term demand in inland Germany.

 Source: CME

Source: CME

 Source: CME

Source: CME


 The backwardation curve continues to shift down along with the drop in flat price. Deferred spreads continue to get affected the most as 2019 balances comes under more scrutiny. If oil prices drop another $3 we can see some parts of the WTI curve in contango.

The backwardation curve continues to shift down along with the drop in flat price. Deferred spreads continue to get affected the most as 2019 balances comes under more scrutiny. If oil prices drop another $3 we can see some parts of the WTI curve in contango.


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