Daily Oil Market Report - 18th October 2018
Equity Market sell-off poses downside risk for oil prices : Crude finished the day lower with WTI down $1.10 and Brent down 76c. The move down was due to downward move in the whole WTI curve structure which we have witnessed for the past few days. The macro jitters didn’t help oil either. S&P was down -1.4%, while the Shanghai Composite Index is now among the world’s worst performing benchmarks this year. The Shanghai index hit a 4 year low overnight.
We’ve moved our crude structure chart up in the email to highlight the WTI curve slipping into contango. Over the past few days we have Brent and WTI curve structure weaken along with the downward flat price move. The move in WTI structure has been more severe due to the big weekly stock builds. The last few crude builds has made US crude stocks reach almost the same level we were at the beginning of this year. The products stock build is a different story and it paints a very bearish picture. The big builds in gasoline have been counter seasonal and continues to depress gasoline cracks to negative levels.
One would expect the downward move in WTI structure to bring down the Brent structure along with it. However we witnessed the opposite today. With Brent down 76c, Dec/Dec structure was up 25c. This probably means that some producer hedging is going on as Dec/Dec is normally very highly correlated with front month. In addition, Brent front spread traded up 16c on the back of no reported news. Brent front timespread trades in its own world and we have seen the BFOE grades comprising the Dated Brent benchmark trading very strongly. This is despite the very weak refinery margins we have been witnessing due to the structurally weak gasoline market. A strong dated market will be further bad news for European refiners.
On fundamentals, Turkish refiner Tupras was in talks with the US for sanctions waiver for Iranian crude. Recently, Turkey has had all their stars aligned and everything seems to be going well for them. They have become international heroes with the Khashoggi controversy, they have released the US pastor leading to some sanction removals, their equities are slowly gaining lost ground and lastly their STAR refinery will be officially open tomorrow. This new 215KBD refinery will produce no fuel oil or gasoline and almost 60% diesel. It will help reduce Turkey’s diesel deficit and put further competition on European refiners that are under pressure from current weak margins.
In non oil, equity selloffs and geopolitical news made the headlines. US Secretary Mnuchin will now not attend the Saudi investment summit. This ‘Davos is the Desert’ event will now look less Davos and more like a desert. Mnuchin’s cancellation sparked concern for increasing Saudi/US tensions, however the equity markets reacted much more dramatically than the crude market on this news. Safe havens like gold continue to stay stable while the Italian-German 10-year yield spread reached the widest level since 2013.
CHART OF THE DAY
JODI Data update: The latest JODI data was out today. Saudi crude stocks continue to decline to record low levels. As they promise higher production levels to satisfy customer needs in Q4, these crude stocks can continue to head lower especially if they are unable to sustain such high production levels. On the flip side, their direct burn has been going down this year as more power generation is now be replaced by natural gas. Burning crude has been a very expensive way of keeping the lights on for Saudi and they are finally freeing up those much needed export barrels. We can see direct crude burn reach around 200KBD in Q4.
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