Daily Oil Market Report - 15th October 2018

The Oil Market Ignores Saudi Diplomatic Rift : Markets opened up over a $1 on fears of potential US sanctions on Saudi, however prices settled only 35c higher. Trump tried to diffuse the situation by saying he trusts the Saudi King and sending Mike Pompeo to Riyadh. If US could get along with Saudi after the 9/11 attacks, this should be a minor hiccup for their special relationship. The Saudi tensions impacted certain equities like the Japanese holding company Softbank which was down over 7% as its heavily backed by Saudi cash. The impact of Khashoggi’s disappearance is still unknown in the wider markets.

The market traded sideways for most of the day. With the macro sell off now paused for the time being, the oil markets can finally resume trading on fundamentals. Russia reportedly raised oil output to a new record high yet again. They have produced 11.4MMBD for the first 2 weeks of October. That’s 50KBD higher than last month and 450KBD higher since January. Iraq also plans to export 4MMBD in Q1 19. The appointment of a Kurdish PM has given hope for a sustainable Iraq/Kurdistan relationship and the resumption of Kirkuk flows to normal levels.

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EIA released their drilling productivity report later today. The shale regions continue to show very healthy monthly production gains. Collectively they gained 98KBD, with Permian showing the largest growth. The Permian November oil output at 3.5MMBD was greater than Iran’s September production!

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In non oil, nat-gas continued to rally on low stocks and expected colder temperature. Latest CTFC data showed that spec length in Nat-Gas has reached a record level. Gold continues to rally as well benefiting from last week’s volatility in the markets. FTSE 100 didn’t last that long below 7000 and was up 0.5%.

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CHART OF THE DAY

RBOB-Heating Oil Spread: This year’s gasoline meltdown is causing many relationships to break down. We briefly saw negative RBOB and EBOB cracks. Now we are seeing RBOB prices almost 40c/gallon or $17/bbl cheaper than Heating Oil in US East Coast. This is not sustainable and east coast refiners must be hurting and cutting runs. Refiners should be doing all they can to reduce the gasoline yield and make as much distillate as possible. However, the US crude slate is getting lighter due to increased shale which is making US refiner’s job harder to cut the yields of light end products.

 Source: CME

Source: CME


 The backwardation in the curve structure continues to weaken despite oil prices stabilizing. Mar/Apr Brent is now almost close to 10c backwardation while some parts of the WTI curve are near 5c backwardation.

The backwardation in the curve structure continues to weaken despite oil prices stabilizing. Mar/Apr Brent is now almost close to 10c backwardation while some parts of the WTI curve are near 5c backwardation.


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