Oil Market Report - 27th February 2019

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IP week sets out a bullish narrative: Prices barely changed this week but the consensus is growing for a bullish crude market especially in the second half this year. International Petroleum week took place in London and the market consensus is bullish. However, the bullishness this time means that prices will reach into the $70s and not $100 like other previous IP week’s. The bullishness has been tempered significantly. The current physical market is tight despite refineries undergoing maintenance. However, looking ahead crude intake is expected to ramp up as US and Asian refinery turnarounds ease off.

The center of the discussion was crude quality. The drop in Venezuelan exports and continued voluntary cuts from Saudi will continue to have a big pressure on sour barrels. Some Angolan sour barrels that used to trade on huge discounts to Dated Brent are now trading at positive levels.

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The other big highlight from IP week was that Platts reformed the Brent crude oil benchmark yet again. They will now include BFOET grades on a delivered basis (previously only FOB was allowed) from October 1, 2019. This will increase liquidity into the benchmark. To add to that, if UK does crash out of the EU without a no-deal Brexit, then South Korea will lose its 3% rebate on UK’s Forties crude. Both these factors can contribute to Dated Brent weakness in Q4 this year.

On the products side, light ends is expected to remain weak until IMO starts. Goldman came out with an IMO report and they see the most upside on gasoline cracks as they see distillate forward cracks fairly valued. However, the new refineries coming online this year like Hengli, Rongsheng, RAPID have big light end output and should add pressure to the market if demand doesn’t surprise to the upside. On global demand, 2019 should see growth of 1.3-1.4MMBD. There was little talk of recession this year given equity markets and metal prices have rebounded significantly from the lows seen this year.

The bearish points of weak refining margins and US production growth surprising to the upside again were barely touched upon.

 

In non IP week related news, Trump tweeted for the first time in months about the oil market. The “Trump Put” truly exists in the market as prices fell 3% after his tweet. Saudi remains committed to OPEC cuts this year and it will not be a surprise if Trump tweets again if prices touch $70.

Brent spec length continued to increase for the 7th week in a row. Spec length has increased by 80,000 contracts since the beginning of the year but is still almost half the levels seen last year.

Source: ICE

Source: ICE

 

US DOE stats came out with a huge surprise draw this week. DOE has been a constant source of bearish news for the oil market recently, but this time it really surprised the market. However, the main reason for the surprise draw was the huge drop in crude imports. There has been a lot of fog issues in Houston and we are not sure these low imports are here to stay. Imports fell from most countries particularly Canada and Saudi. Nevertheless, crude exports remained high at above 3MMBD for the second week in a row. Net crude imports fell below 3MMBD for the first time ever.

Source; EIA

Source; EIA

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The structure for Brent and WTI continue to diverge. Ignoring the prompt spread contango due to expiry, Brent has consistent backwardation through the curve. While WTI has deep contango for the first 6 contract months. Either the US has too much crude or the Atlantic Basin is very tight. This divergence in structure doesn’t seem sustainable. If US continues to export at 3MMBD, maybe this gap will narrow.

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