Oil Market Report - 7th January 2019
Welcome to 2019: 2018 was not a year for consensus trades. The market consensus was for oil price to continue rallying due to the Iranian sanctions. However, the year will be remembered for the 40%+ price drop from its peak. We plotted the forward curve every day in 2018 (see video) and was surprised to see the market was in backwardation for 85% of the time. However, now the shallow contango remains a horrible market for traders and investors as the negative roll yield reduces risk appetite and as a result spec length has drastically dropped.
In products, the market consensus was for distillate cracks to strengthen and fuel oil to weaken as IMO deadline approached closer. However, fuel oil market defied all odds and was one of the rare bullish markets. In light ends, gasoline continued to trade in negative territory (negative cracks to Brent). Refiners should have reduced their production of gasoline, but US gasoline yields remain high as the crude slate continues to get lighter.
As 2019 rolls on, the market consensus is not as strong as last year. Very few polls and investment bank price forecasts show prices above $80 by the end of this year.
Some of the big talking points last year were:
1) US supply: Earlier on in January 2018, EIA has assumed average US 2018 production growth at 970KBD. In December, this estimate got revised up to 1530KBD, an increase of 600KBD. In 2019, EIA is assuming growth at 1180KBD. With Permian logistical constraints until 1H 2019 and a lower y-o-y price, EIA might able to get this year forecast a bit more accurate than last year.
2) Gasoline Weakness: Gasoline cracks traded in negative territory (against Brent) as there was not enough demand for light end products. In addition, gasoline yields were high in the US despite weak pricing as US refiners crude slate continues to get lighter. According to EIA monthly data, US product demand is up 1.4% YTD (data up till October). If we split that data, diesel demand is up by 6.2%, other products up by 0.5% and gasoline demand is down by 0.2%. With pump prices now near $2/gal, we should not see another year of negative gasoline demand growth unless we get a recession.
In Brazil, due to high ethanol production, Brazil flipped from a net importer of gasoline to a net exporter, adding further weakness to the gasoline markets.
3) Demand worries: IEA revised down their 2018 oil demand growth to 1.3 million barrels per day. The downward revisions took place in the middle of 2018 when Brent climbed above $80. There were strikes and protests over high fuel prices in India/Brazil/etc. The drop in prices will be welcomed by consuming countries like India and China. IEA has a very conservative demand projection of 1.4 Million Barrels per day. Except for a global recession, global demand should surprise to the upside if these low oil prices continue.
4) OPEC to dominate headlines again in 2019: Saudi Arabia has promised to cut further production and do what it takes to reduce global inventories. They are targeting US inventories as the market looks at this data every week. They have reduced exports in the US in the near term. However, eyes should be on Iraqi production in 2019. Any truce between Kurdistan and Iraq can lead to record high production from Iraq which will make Saudi’s job harder to manage in balancing the market.
We wish all our readers a happy 2019 and wish them all the luck. At OILytics, we are continuing our work to build the largest free oil database. Our website is still construction but we continue to put any timely relevant charts on twitter. We aim to write these market reports once a week.
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