Daily Oil Market Report - 26th October 2018

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Green shoots for Oil prices?: Crude prices staged an impressive rally on Friday, despite equity markets continuing their downward trend. Brent was up 73c and WTI was up 26c despite S&P being down 1.8%. WTI settled above 15c above its 200 day moving average and the Brent structure moved back to backwardation (ignoring the front spread which expires this week). All these signals are pointing to some stability in oil prices and possible lows in oil prices are being set in, especially as we enter the Iranian Sanctions deadline of 4th of November. US has not issued any new waivers and China’s major refiners haven’t bought any Iranian crude for November delivery (at least officially!). There was a Reuters article that the Bank of Kunlun will stop doing business with Iran. This bank is a major Chinese bank which carried out payments for Iranian oil exports during the previous sanctions.

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On Friday, the latest CoT data showed further liquidation of spec positions. Brent managed to shed 48K contracts and WTI shed 41K contracts. Brent spec length has dropped 60% from its peak earlier on the year. The sharp drop in spec length in WTI has been even more severe due to local grades like Midland and WCS hitting record low levels. In addition, the contango in the curve has led further acceleration of selloffs and investors lose the roll yield advantage. The managed money in WTI hit a peak of 496K contracts and is now at 206K contracts for WTI CME. On a seasonal basis, this is now below the 5 year average. The record pace of crude stock builds in the DOE weekly stats has caught many by surprise and further builds (expected this week) will cause further liquidation.

On product spec length, Gasoil shed the least spec length as cracks continue to hit new YTD highs. As gasoline continues to weaken, fuel oil and gasoil rally in order to support the refinery margin. The long/short ratio is the highest for gasoil at 22.6:1 compared to Brent which is at 8.7:1.

Gasoline continues to weaken further. RBOB cracks made new lows and settled at -1.58 against Brent. We saw December RBOB trade intraday low of 50cpg or $21/bbl below heating oil. This should give plenty of pricing incentive for US refiners to switch their refinery slate to maximum distillate at the expense of gasoline. However, we haven’t seen that as refineries are slow to move. However, if the gasoline continues to weaken it will soon become a by product of distillates that refineries will try to get rid of.

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CHART OF THE DAY

Global Price Benchmarks: The below chart shows the various crude benchmarks, some of which like Shanghai INE that are gaining volume and open interest. Shanghai which is a delivered price rather is the most expensive benchmark as of Friday. On the other hand, you have WCS Hardisty which is trading at near $45 discount to WTI. The spread between Shanghai and WCS is now at almost $60, some of the widest spreads we have ever seen between crude benchmarks.

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