Daily Oil Market Report - 4th November

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The Sanctions are Coming: Donald Trump’s tweet of “Sanctions are coming” on Friday rounded up a very interesting week in oil markets. Crude prices finished the day slightly lower but were down 6% week on week, even though global equities moved higher. Pompeo and Mnunchin announced that 8 countries would be given waivers for Iranian barrels. Initially, this list of 8 countries seemed long as we could only name China, India, Turkey, Japan, Korea, Taiwan on top of our heads. There might be other countries like Iraq or Greece but we await further details. Suddenly, the base case of 1 million barrels of Iranian exports in Q4 is now the most bullish case. This is one of the reasons why speculative length in Brent and WTI is vanishing every week. The sanction go live from midnight eastern time tonight which should make next week an interesting week for oil as well.

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In non Iran news, there was some very positive production news from Kurdistan. KRG reported that production from Peshkabir field has far exceeded production. KRG currently exports around 400KBD and they used to export around 600KBD in 2016 when they had fewer problems with Iraq’s SOMO. In addition to the production increase, they have also increased the pipeline capacity from 700KBD to 1000KBD in order to accommodate future growth. Iraq produced 4.65MMBD in October and we might see a 5MMBD print before Q1 next year if this KRG momentum keeps going.

On products, gasoline continues to remain depressed with negative prompt cracks. Diesel and fuel oil continue to be very supportive which are keeping margins healthy. The talk of run cuts in Europe have disappeared. Only refiners that have a high naphtha and gasoline yield are feeling the pressure. Plus with prompt Brent structure flipped into contango that has reduced the price of the prompt barrels. Fuel oil has been the biggest bull market in the oil basket. This product was expected to be obsolete in the run up to IMO. However, it seems that supply destruction due to refinery upgrades has far outpaced the supposed demand destruction. Fuel oil is so strong in Asia that the FO 180 crack is at similar levels to the 92 RON gasoline crack. It’s better to be a simple refiner right now rather than a refinery with a big FCC. Crazy times in the refining world.

The important data release next week will be the EIA’s Short Term Energy Outlook, which is out on Tuesday. They must be revising their US production growth significantly after the monthly PSM numbers in August. Exxon and Chevron both had very impressive quarter on quarter production growth from their Permian assets.

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ICE and CME Open Interest

The weekly CoT data showed the 5th consecutive decline in managed money or speculative length. This has been widely anticipated as the WTI and Brent curve slowly dipped into contango. However, the pace of the decline has been impressive aseptically just as the Iranian sanctions start. The aggregate Brent and WTI managed dropped by 55,950 contracts. Of which 34,196 were in long liquidation and more interestingly 21,754 in new shorts. Over the last 5 weeks, WTI and Brent has shed over 320,000 lots of speculative length. Some of this liquidation could have been due to the wider macro jitters, however with that disappearing we might see some stability in the spec length in the next few weeks.

Surprisingly, the biggest bearish market (i.e RBOB) has only shed 26,000 lots. Would have expected RBOB length to be below the 5 year average given we are in a negative crack environment and $20/bbl below Heating Oil.

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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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