Daily Oil Market Report - 6th November

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Max Bearish Mode: Crude oil prices struggled to catch a break and WTI prices were down for the 7th session in a row. Brent settled a $1 lower while WTI was lower by 90c. There was no obvious headline for the initial sell off which led to Brent almost down $2 at its intra day lows. However, the API data post settlement did not help. US crude stocks increased by 7.8 mln barrels, much more than expectation, while gasoline drew 1.2mln and Distillate fell by 3.6mln barrels. Its hard to trust the API data, but they have been fairly accurate the past few weeks. The big surprising data for us was that that refinery runs was down by 118KBD when we were expecting runs to be up by 200KBD. Peak refinery maintenance in the US should be over, the only explanation could be some refinery run cuts due to the weak gasoline market. We await DOE’s to verify this data tomorrow. If the drop in runs is in PADD 1, then the weak gasoline market is having an impact on the refinery operations.

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The EIA Short Term energy outlook was out today. There was only one main highlight. The strong August PSM crude numbers led them to revise their US production number upwards. US production will hit 12mmbd, 6 months earlier than their previous reports.

The latest Russian data was out as well. Russian refinery runs dropped month on month due to peak refinery maintenance in October. However, runs should now pick up and hit almost 6mmbd in nov/dec. The strong fuel oil and distillate markets should be ideal for Russian refinery margins as that’s what they produce the most and they will be running at max. This would cut the Russian crude exports and also help put some cooling pressure on the unstoppable distillate and fuel oil cracks.

In non oil, equity markets were quiet with low volumes. Singapore was shut due to Diwali and US markets were quiet due to mid term elections. Natural Gas was on fire on Monday due to the cold weather forecast over the weekend. The low US inventory picture and freezing weather can create a scenario of very volatile prices with upside risks. So far, we have a cold US but a very mild Europe and Asia.

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Chart of the Week - Saudi OSP’s

Saudi OSP’s are normally not a headline as they don’t change much. A lot of variables go into setting these levels. Saudi’s supposedly look into the crude markets in different regions, sweet/sour crude differentials, light/heavy product spreads, etc. No model can predict the crude OSP’s. Saying that, the decision to sharply raise all the OSP’s to the US looks strange. These OSP’s to US are now at multi year highs. US OSP’s are set against the ASCI index and not Brent. So possibly one reason could be the depressed ASCI index. On the other hand, Saudi’s might want to reduce crude being sent to the US as they are stock building at a very rapid pace. US imports around 800KBD of Saudi crude this year, a big chunk of which must go to the Saudi owned MOTIVA refinery. Its still too early to say whether Saudi wants lower US imports, as these OSP’s have to be compared with Iraqi' Basrah.

In addition to the US, Saudi raised the OSP of Arab Heavy to Asia to a 6 year high. This shows the sour tightness in Asia. Not only will the lack of Iranian barrels be felt, but refiners want sour barrels more than ever due to the huge rally in fuel oil cracks.

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Brent/WTI flat price and structure continue to weaken. Very hard to believe that the first 5 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. Globally, runs will increase by 3mmbd from the peak maintenance in October to max runs mode in December/January.


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