Oil Market Report - 9th April 2019
An impressive first 100 days of 2019: Prices continued to grind higher reaching 5 month highs as Brent breached above $70 for the first time since November 2018. Brent and WTI prices are now above the 200 Day Moving Average (DMA) after being below their 200 DMA for over 100 trading days in a row. OPEC continues to do their job led by Saudi cuts, as every member was compliant in OPEC except for Nigeria. The oil markets have everything going for them, with supply disruptions from Venezuela and Iran, a monthly drop in US production for the first time in 5 months and a macro riskon environment. Equity markets remain lofty, commodity prices remain elevated except for coal and even Bitcoin has had a 10% rally this week after being dormant for many months.
The sign of risk of environment was evident by the demand for Aramco bonds. Aramco was in the market for $10BN but got $100BN+ worth of offers as investors hunt for yield globally.
The backwardation across WTI and Brent curve is now consistent and throughout the curve. It looks like OPEC’s job is done as prices are above $70 and backwardation in the curve will make hedging for Shale producers less appealing. This backwardation will also hurt refiners as they will try to delay their crude purchasing as much as possible and empty any excess refinery tank storage that they might have. The refinery margins have improved from the past couple of months due to summer grade gasoline. Margins are still on the seasonal lows but no where near run cuts levels despite a tighter physical crude market and high flat price.
The key discussions that will take place in the next few months is how OPEC manages its exits from the current cuts. Russia’s Novak hasn’t been that vocal this time around to end the cuts, but it will be in the back of the mind again for Russia. Similarly, Saudi has taken the bear of the brunt for the OPEC cuts and will want to increase production especially when Asian refineries come out of refinery maintenance after the summer. Saudi has increased their OSP prices globally and especially very sharply for European customers. As they cut production and exports, these OSP prices will remain elevated. However, Saudi knows the risk of their Asian customers trying to replace them with other barrels.
Goldman Sachs came out with a report saying that the current market resembles in the oil market of the 1990s which saw years of backwardation. The spot market remains tight but the forward balances remain well supplied especially due to Permian debottlenecking and the projects coming online in early 2020s from Guyana, Norway, Brazil, etc.
In fundamental data, EIA released their monthly data and also the latest STEO report. In the monthly data, EIA reported a monthly production drop for the first time in 5 months. The below interactive chart shows crude production by state and by API. It further highlights the crude quality issues which is occurring in the US and globally. US has had phenomenal growth in light sweet crude but declining on crudes below API 30. This interactive chart is best seen full screen by pressing the square button in the bottom right and clicking on any of the states to see their historical production.
EIA’s STEO didn’t have much to update apart from the fact that they lowered their 2019 global demand by 50KBD to 1.4MMBD. Despite the drop in monthly Jan-19 numbers, the EIA raised the 2019 crude production forecast from 12.29MMBD to 12.38MMBD.
Later this week, IEA and OPEC release their monthly reports which should give us a better picture on how the OECD inventories are doing, a key metric for this round of OPEC cuts.
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