Daily Oil Market Report - 23rd October 2018

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Structure led Sell-Off: Crude prices had a violent move down on no major headline. Brent was down over $4 at one point but settled $3.39 lower. WTI was the better performer out of the 2 benchmarks but was still down $2.74. This violent move downward had been a long time coming as the Brent and WTI structure has continued to weaken this month. Dec/Dec WTI settled at 22c, this spread was once at $7 only a few months ago. In our yesterday report, we expected this downward move to occur when Brent would touch contango, so we were surprised at the timing of the downward move. Brent structure fell sharply with the front spread hitting a low of 16c but closing at 27c. The whole Brent structure remains in backwardation but some spreads like Jan/Feb reached a low of 1c.

The sell off was also due to the weak macro outlook. Chinese shares were down again and the Eurostoxx 600 index hit a 2 year low. The ongoing battle between EU and Italy regarding its budget continues to be under priced by the market. S&P was down 2.3% at its worst but recovered to just a 0.3% drop at the close. Shares in Caterpillar, the US industrial company which is normally a bellwether for global GDP, dropped 7.5% which was the biggest drop since 2015 on weak earnings.

This sharp move in flat price will make technical analysis more interesting. WTI breached its 200 day moving average (MA), while Brent broke through the 100 day MA but still nearly $3 away from its 200 day MA. Due to the sharp sell off, the 14 day RSI for both contracts are signalling a buy, however one has to be brave of a market which sell offs so violently on no major news.

API data showed a hefty crude oil build of 9.9 million barrels which added pressure to prices after close. There is a huge catch up due to last week’s big DOE build so expect a DOE number of around 3 million build. Gasoline stocks drew 2.8 million while distillates drew 2.4. This reported week is the peak maintenance period for US refineries and US crude runs should continue to pick up after. This will help draw US crude stocks but lead to product builds.

In Europe, gasoil cracks continued to rally and Nov-18 cracks hit a YTD high of over $16. The strength in gasoil is coming despite the record low Rhine water levels which has deferred demand in inland Germany until rain arrives. The strength in gasoil cracks is helping offset weak light end cracks and saving some refineries from run cuts.

In fundamentals, South Korean data was out. Jan-Sep product demand is up 0.7%. Their naphtha imports are up 10% YTD on very strong petro chemicals demand and great petchem margins. On crude imports, their imports are almost flat y-o-y at 3mmbd but they took no Iranian crude in September as widely expected.

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Technical analysis and 200 Day Moving Average: The sharp price down today led to WTI trade below its 200 day MA. This is the first time WTI has done that since October 2017. We need to monitor this very closely in the next few days as in January 2017 as prolong periods of prices being under 200 day MA leads to weak pricing periods we witnessed in 2015/16. However, in January 2017 prices didn’t last under 200 day MA for very long and continued its upward trend. Brent hasn’t breached its 200 day MA yet and is still nearly $3 away from it.

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