Daily Oil Market Report - 9th November

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OPEC, here we go again: Crude prices had another down day with Brent down 26c and WTI down 48c. WTI was down for the 10th day in a row, which is the longest losing streak since 1984. Despite the long losing streak, prices were down only $7 during this losing streak. We have seen far bigger price corrections in previous losing streaks.

Due to the long losing streak, technical indicators like RSI have dropped to new lows. Over the last 18 months they have been very useful indicators with a sell indicator when RSI hits 70 and buy indicator when RSI hits 30. However, not this time around as RSI continues to be below 15.

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Along with the downward move in flat price, the downward shift in Brent and WTI structure has been relentless. Its no longer that just the prompt timespreads are getting hit and deferred spreads staying strong. Jun-Dec WTI is at -45c, while Brent Jun-Dec is still backwardated at 48c for now. The first 4 Brent timespreads average at around 20c contango. If they get weaker by another 10c/month, companies with available tank storage should be able to make money by putting them in short term storage. However, not all curves are in contango. Crude and gasoline remain in prompt contango, but Diesel and Fuel Oil are showing very strong backwardation due to the global shortage for these products.

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The biggest news over the weekend was OPEC’s JMMC meeting. There were a lot of headlines from different countries and sources, however there was the all important headline from Saudi’s Al Falih. He said that Saudi plans to initiate production cuts and will start by 500KBD in December. If this was a game of chicken between OPEC and US shale, OPEC have lost twice. This latest move to cut production again will provide a floor for oil prices but no ceiling for US production growth. In IEA’s December 2017 report they had US crude production at around 10.6MMBD for Q3 2018. EIA reported August 2018 production at 11.6MMBD. IEA missed the production forecast by a MILLION BARRELS PER DAY. This latest move by OPEC can lead to once again underestimation of future US projections. OPEC will find cutting production the second time around much more difficult. We have UAE at record production at 3.25MMBD and they plan to reach 3.5MMBD by the end of this year.. We have Libya at near 1.3MMBD, and as BP and ENI go back in the country, we might see further production jumps in Q1 2019. We have Iraq, which under a Kurdish PM, is itching to resolve the issues between Kurdistan and Iraq. Lastly, we have Nigeria who will be producing an extra 200KBD from the deep-water platform of Egina by the end of this year. As its offshore, this production will be insulated from any future violent attacks that may occur. The market will probably take the Saudi cut positively as markets open tonight and we might finally see WTI prices not falling for the first time in 2 weeks. However, the Saudi cut of 500KBD will be added to the global spare capacity. The main point of oil bulls of low spare capacity will now be less valid.

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Speculative Length in Freefall

The run up to Brent hitting $86 was blamed on speculators by OPEC countries like Saudi who tried to explain the price ramp up in September to their customers in Asia. 6 weeks later, the dramatic drop in speculative length is causing a big headache for OPEC countries. Collectively, 6 weeks ago, net spec length in Crude, Gasoil and RBOB was at 1.1 million contracts. As of latest data, its now at 600,000 contracts, a drop of almost 45% in 6 weeks. It is not just longs that are giving up on their positions, we have short positions increasing in crude and RBOB. The short position on WTI is now at the 5 year average. The only bright spot in spec length is gasoil. Due to strong diesel prices and a backwardated structure, spec length has dropped only slightly in the last 6 weeks.

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