Daily Oil Market Report - 31st October 2018

Oil Bears in Full Control: Crude prices fell sharply on the run up to close today, even when equity markets were supportive with S&P up 1.1% today. As it was December Brent contract expiry, the January contract closed 87c lower, while WTI was lower by the same amount. Prices closed $2 lower from the intra day high. Main reason behind the drop in prices was due to Natioanl Security Advisor Bolton suggesting that a lot of countries won’t be able to cut Iran oil imports all the way to down to zero. No one expected for Iran exports to drop to zero, but this admission by Bolton hints at potential waivers or atleast not immediate sanctions.One of the Indian ministers said that they plan to use an Indian bank in order to pay Iranian exporters in Rupees like they did during last sanctions.

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A lot of data came out today: Russian production for October, weekly EIA report (we talk below in greater detail), OPEC monthly production for October and finally EIA Monthly PSM data. Russian production hit another record high in October. Russian production continue to beat all market expectation and is now up 500KBD since January. Russian production is seasonally higher in Q4 so expect new highs to be in November/December. On the EIA monthly PSM, the biggest headline was the huge crude production number. US produced 11.35MMBD in August, a monthly jump of 416KBD. That made US production up by 2.1MMBD y-o-y and up 1.35MMBD since January. These are just huge numbers and beat even the most aggressive forecasts. The weekly data is still showing production at 11.2MMBD, however that explains the large persistently high adjustment factor.

In non oil, today ended the horrible month for equities. S&P has rallied nearly 3% in the last 2 days but was still down 6.9% over the month. With the upcoming midterm US elections, there might be further macro headwinds. In this volatile month, surprisingly bitcoin was one of the most stable asset classes. Not a bad way to celebrate its 10th birthday. Dollar index continues to surge and hit new highs, this will make Trump’s job harder as he tries to bring more manufacturing back to the country.

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The EIA weeklies had an overall constructive number, but the market didn’t react that way. US crude stocks increased for the 6th week in a row, but a build of around 3.2mb is not bad given the SPR released 1.5mb. Crude exports came strong at 2.5MMBD despite the current high freight rates which might be making long haul journeys expensive. US refining runs increased, but will increase dramatically in the next 2-3 weeks when refinery maintenance season finishes.

On products, we drew around 9mb of which 7mb was in gasoline and distillates. The market just hates gasoline for now and even this above consensus draw didn’t stop gasoline prices from falling. Gasoline stocks are now back within the 5 year range. However, the problem for gasoline is that seasonally we are entering big build months of November and December. Once refining runs are above 16.5MMBD, we find it very hard for gasoline to draw. Gasoline exports are very constructive and the drop in imports over the last 3 weeks is helping balances for now.

On distillates, the market is so bullish and its very risky to short middle distillates despite the elevated levels. Distillate stocks are near the 5 year lows and US are recording very good demand prints for distillates. Given the huge price premium distillate has over gasoline at the moment, we are surprised distillate yields have not picked up dramatically. Every refiner in the US should be logically trying to max diesel at the expense of gasoline. Maximize hydrocracker runs and trim runs on the FCC units.

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Brent and WTI flat price and structure continue to weaken. Very hard to believe that the first 3 Brent spreads are in contango given the market expectation was one of the tightest Q4 balances after the loss of Iranian barrels. 2019 balances look much longer despite Iran, but not sure if the market is ready for contango. From a risk reward perspective, Q1 Brent spreads look like a buy given the increase in refinery runs expected in November and December.

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