Daily Oil Market Report - 19th October 2018
IMO 2020 Wobble? : Crude finished the day higher by nearly 50c in a relatively quiet day given it was a Friday. The biggest news was the WSJ article about IMO, which we talk in greater detail in the chart of the day section. The news caused a rally in fuel oil cracks and depressed deferred gasoil cracks. Share prices in US refiners were down as they are one of the biggest beneficiary of the IMO spec change. Valero share price was down over 8%.
COT data released on Friday showed WTI and Brent managed money net length falling by 104,177 lots. WTI managed spec net length has almost halved since the peak since in January. It will be interesting to see how the net spec length changes with the prompt WTI curve firmly in contango. Passive oil investors will not benefit from the roll yield strategies and should switch their investments to Brent which still has a healthy backwardation in the whole curve.
There was some market talk about increasing Iranian exports in October against the falling trend. Tanker Trackers and Petrologistics have both confirmed recent uplift in Iranian volumes. However, still difficult to find who the buyers of this increased volume is. The market has so far absorbed the drop in Iranian exports and any further Iranian increase will put pressure on the physical markets.
CHART OF THE DAY
IMO 2020 Wobble: The WSJ article on IMO rattled the 2019 forward curves. WSJ came out with a piece saying that the Trump administration is aiming to slow the roll-out of the fuel switch in 2020. The article mentioned that they are not looking to withdraw from the agreement but just delay or slow the implementation. This has been one of the most crowded trades in the market with every consultant and bank expecting the gap between gasoil and fuel oil crack to widen. However, this year fuel oil cracks have seen one of the best bull markets, while Gasoil cracks have been range bound. The Dec-19 crack spread between gasoil and fuel oil has narrowed to the lowest levels seen since January. If we see more headlines like these, we can expect this gap to narrow further. The narrowing gap will give simple inefficient refiners a great chance to lock their forward margins, which otherwise would have been forced to shut down after IMO 2020. This news also put downward pressure on the Cal-20 Brent-Dubai spread as Dubai yields more fuel oil than Brent. Market consensus after this news is that US is too late to affect the IMO implementation and the 2020 date will remain untouched. However, these headlines show that its very hard to trade IMO given the volatile path to 2020.
In non oil, risk off is the current mood. Oil prices have been correlated with the equity markets and showing similar month to date losses this year. The Saudi-US relationship remains a big uncertainty as Saudi have still failed to provide a valid reason behind Khashoggi’s death. Saudi stock market dropped over 3% at the open but the market recovered all the losses by the time it closed.
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