Oil Market Report - 14th January 2019

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Déjà vu all over again: 2019 started trading on a very positive note. Brent and WTI had a 9-day winning streak. Despite the 9 day winning streak and prices jumped around $9 in that period, there was relatively little change in the curve structure. Prompt spreads are still in shallow contango however second half spreads like Jun/Dec rallied more than 30c in the past week. There was very little fundamental news out in the 2 weeks and the price action was mainly due to technical factors as crude prices entered in oversold territory. However, we have a busy week ahead with EIA/IEA and JODI all updating their data.

It looks like we are entering a déjà vu moment with Saudi and Russia cutting production and only to let US shale production grow and beat market expectations as prices increase.

This time around, in addition to supply growth fears, oil markets also faces demand slowdown fears. Macro fears and stock market drop in December prompted people to think we are heading for a recession. Goldman put out a note saying they saw oil demand grow at 1.5MMBD in 2018 and are expecting 1.4MMBD in 2019 despite expecting lower average prices. Gasoline market remains depressed as US gasoline demand remains flat. Its been diesel cracks that has carried the refinery margin in Europe in 2018. However, latest spec length data show that investors have given up on Diesel (in addition to crude). Spec length in diesel futures have dropped from a peak of 200K contracts earlier this year to only 6K contracts. With IMO less than 12 months away, this spec length is very low.

See below spec length data for Brent and Gasoil futures. We are still missing CTFC spec length data for the last few weeks due to the US government shutdown.

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Demand worries continue to focus on China. There are worries that the economy (especially trucks) transition away from diesel to natural gas. The December Chinese crude import number was a big number (above 10MMBD for the 2nd month in a row) but its hard to find out demand from that number. Latest Indian data from PPAC was fairly constructive. Despite high prices in the middle of the year and a depreciating rupee, Indian oil demand grew by 4.4% in 2018. This is still below their GDP growth of around 7% but the declining oil intensity in Indian and China’s economies is a worrying long term trend for oil.

Indian diesel demand was up 4% y-o-y but the star performer was gasoline where demand increased by 9% y-o-y. However, gasoline has a much lower base than diesel. This is in stark contrast to the US where gasoline has much bigger base but has flat growth. This year India has elections which should provide a boost to demand as government spending increases.

Baker Hughes Rig Count: At Oilytics, we love open source and big data. The below visualization crunched more than 600,000 rows of data. We created this template below so we can portray all the information in one screenshot. Once our website is up, we plan to create more templates this like. Oil rig count was down for the 2nd week in a row, but the total oil rig count has been in a very narrow range between 800-900 for the past 9 months.

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