Oil Market Report - 5th February 2019

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Divergence in Light and Heavy Crude Fundamentals: Oil prices remained in a narrow range yet again this week despite the worsening situation in Venezuela. The 5 day Moving Average and the 50 Day moving average continue to be $2-$3 apart. The market is finally recovering from peak pessimism seen a few weeks ago. Managed money spec length increased for the 3rd week in a row and is now at a 2 month high. Bulk of the increase in spec length was due to shorts closing out their positions.

The market is expected to be quiet this week due to the Lunar New Year celebrated in Asia.

The physical crude market is showing a much healthier picture with certain physical grades trading very strong. Deferred structure like Dec19/Dec20 Brent and WTI are now hitting 2 month highs. Its looks like the market is getting ahead of itself. Its focusing more on supply outages from Venezuela and lower planned production from Saudi and ignoring the poor global refining margins.

There is increasing talks about the quality mismatch in the crude markets which shouldn’t be a surprise given the light end product weakness and bulk of the crude growth is in the lighter sweet barrels.

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US L48 Crude Production by API

US L48 Crude Production by API

EIA released their latest Petroleum Supply Month and we analysed the US crude growth by API. The only 2 sources of significant heavy crude production in the US is offshore Gulf of Mexico and California. The bulk of the rest of the states production is light sweet. There are various definitions of light crude but any crude above API 35 can be considered light. For example, Forties – the main grade behind Brent benchmark has an API of around 38-39.

Looking at EIA monthly data by API breakdown, the numbers are astonishing. L48 production grew by 1.8 MMBD year on year. Of which, 1.7 MMBD or 95% of the growth came from light sweet crude. Heavy crude production showed a slight increase of  91KBD or 5% of the total growth.

This is posing several issues but also opportunities for players. Valero mentioned in their earnings statement that they have only 150KBD of spare capacity for light crude in their refineries. If this rate of growth continues for light crude that spare capacity for refiners will eventually vanish. Even with depressed light end cracks, its difficult to imagine refinery run cuts in the US Gulf, given they are one of the best refineries globally.

This growth in light sweet is also providing several opportunities. Chevron will buy the 112KBD Pasadena refinery in Texas from Petrobras, while Exxon plans to take in increasing amounts of Permian crude when they expand their Beaumont refinery.

Saudi March OSP

Saudi March OSP

The divergence in sweet-sour market fundamentals was also obvious in the latest round of Saudi Official Selling Prices (OSP’s). Saudi’s increased the OSP for their heavy grades in Asia and Europe, while lowering the OSP’s for their lighter grades. Surprisingly, they kept the prices for US unchanged given the Venezuelan development should benefit Saudi barrels. However, Saudi OSP to US is already at historic high levels and maybe Saudi wants to remain competitive even though they plan to send lower volumes to the US.

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The deferred structure has strengthened significantly for both Brent and WTI. Both curves are showing some form of shallow backwardation now.


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