Daily Oil Market Report - 23rd November


OPEC’s Déjà vu moment?: Oil prices showed violent moves yet again, down 6% for the 3rd time in the past 2 weeks. Brent dipped below $60 for the first time since October 2017. The market is in panic mode and is telling OPEC that it does not have any more bullets left. This price action must be giving OPEC déjà vu from Thanksgiving 2014 (see our Seeking Alpha article from this weekend). Obviously, the 2018 market is very different from 2014, however, OPEC is increasingly running out of options. What puzzles us the most is why Saudi is producing at 11 million barrels per day. Saudi has been very vocal on making OPEC cuts of around 1-1.4 million barrels per day in the upcoming OPEC meeting. However, on the flip side, they are producing almost 350KBD more than last month. This makes the market nervous that the OPEC cuts might not be a given in the upcoming meeting. Trump is increasingly vocal about OPEC production cuts and his tweet about thanking Saudi Arabia for low oil prices suggest alliances between Trump and Saudi Arabia. Saudi justifies the increased supply by saying that they are meeting demand, which normally peaks in Q4. The oil price is increasingly being controlled by MBS/Putin/Trump and human traders don’t know how to react to this. The industry did not predict this price correction and there are very few winners out of this. The obvious winners from this price rout are the upstream companies that hedged earlier on the year, consuming countries in Asia and algo’s who do well in a momentum driven market.

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The market’s panic mode is perfectly highlighted in the open interest data. Nymex data is delayed until Monday due to the holidays, but ICE Brent net spec length is down for the 8th week in a row shedding almost 65% of its length. Brent net spec length is at the lowest level since January 2016 when prices hit below $30. Famous hedge funds like Andurand have lost 20% in October and must be contributing to the meltdown in Brent long liquidation.

Over the weekend, there were further protests in France regarding high retail prices. Pump prices in France have hit €1.50/litre, despite the recent price drop due to increased taxation. Meanwhile, prices in many parts of the US are now below $2/gal. This is the kind of pump prices in the US that can finally improve the gasoline glut. The market needs to start modelling the increase in demand given weak prices. Similarly, in countries like India and Turkey pump prices will start to fall due to the lagged effect and renew demand again in these regions.

In Mexico, the new President AMLO held a referendum this weekend over a new $8bn refinery. AMLO is ready to scrap the project if the public don’t want it. Previously, the planned airport expansion got cancelled by a referendum as well. Mexico is very short gasoline and any cancellation in new refineries will be a great boon for US Gulf refiners, that are exporting record amounts of gasoline to Mexico despite the weak pricing.

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The recent sharp sell off in flat price has continued to drag down the whole curve along with it. Jun/Dec Brent and WTI is in contango, and Brent Dec 19/20 is now in contango for the first time in months. This was unthinkable from 2 months ago when Brent Dec 19/20 was $5 backwardated. Low oil prices and a contango market is the worst combination for OPEC right now. This contango should provide refiners some relief as it improves their spot refining margins due to cheap crude.

In non oil news, bitcoin made headlines with prices making new lows. It hit below $4000 over the weekend. Mining for Bitcoin energy consumption has now dropped by 20% over the past week. However, Bitcoin mining is still ranked as 61 in the world if it was a separate country when it comes to electricity consumption.

Global Oil Prices: Global Oil benchmarks took a hammering this week. There is no benchmark over $65. There is a one day delay for the OPEC basket price and the OPEC basket should fall below $60 as well. Prices have fallen over $15 in the past month for most benchmarks. The only positive news this week was the increase in Canadian crude prices. After hitting a low of $13 over the past week, there have been reports of production shut ins due to the low prices. Looks like Canadian prices have finally found a bottom and the differential to WTI has improved by $10 in the past week.

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