Oil Market Report - 15th April 2019
Demand Concerns are back in the headlines: Oil prices saw another positive week as all main global oil benchmarks (excepting WTI Midland) saw weekly gains. OPEC basket breached above $70 for the first time in 5 months. OPEC’s job is looking almost complete as we have healthy backwardation in the Brent Curve, OECD commercial inventories for crude and products are very near the 5-year average and according to the latest IEA report, markets are heading for a deficit in the second half.
As a result, speculative length is gaining very quickly. Speculative Brent has been up 12 out of the last 13 weeks. Latest speculative length data from ICE and CFTC showed that the market is increasingly getting very bulled up. Spec length among the 4 main contracts (Brent/WTI/Gasoil and RBOB) has nearly tripled since the lows seen in January. Brent and WTI spec length is back near the 5 year average, however it’s the lack of shorts in the market which is prompting this latest surge. Brent and WTI longs are still 200K contract less than the peak seen last year. There is a lot more room for speculative length to add up. Its also interesting to see RBOB spec length make seasonal highs, given how weak the gasoline market has been the last few months. RBOB has been a start performer the past week with sharp stockdraws in the US due to subdued refinery runs and relatively good demand numbers from the US.
The other surprise is the lack of interest in gasoil spec length as we approach IMO in 8 months’ time and gasoil is supposed to the biggest beneficiary.
The IEA report was out last week and they see tightness in the oil markets in the 2H this year if the current supply outages from Venezuela and sanctions on Iran continue. IEA however tempered their bullishness due to worries in global demand. IEA has been talking about weakening global demand for a few months now but they have not cut their 2019 oil demand growth of 1.4 MMBD yet. IEA saw 2018 demand growth at 1.3MMBD, so we wouldn’t be surprised if they cut their demand projections in months to come. Demand growth is being held strongly by US, China and India but its being offset by weak growth in Europe, Turkey, Japan and Latin America. In fact, Japan’s population dropped by 0.3% last year (443,000 people) and is forecasted to drop every year which is structurally bearish for oil demand in that country.
The IEA report also pointed out that when the first Vienna agreement was made, the deal’s progress was measure by OECD stock levels reaching the 5 year average. OECD stocks for crude and products are now very close to the 5 year average according to the IEA.
With OPEC’s deal increasingly looking like a job well done, Russia will want to start increasing production as soon as possible. Their latest April month to data production is at 11.25MMBD according to Interfax. That is 168KBD lower than the October baseline (they had pledged to cut 228KBD). Russian production always goes up seasonally higher in Q3 and Q4 and Russia would like to reach again the production highs of 11.5MMBD seen in Q4 2018.
In addition to IEA report, we had a lot of data releases last week. Chinese customs data was updated until March. After 4 months of crude imports staying above 10MMBD, crude imports dropped by 1MMBD in March. This is partly due to upcoming refinery maintenance in Q2 this year. At least 6 refineries are planning to close for maintenance this year. A second reason behind this sharp drop in crude imports is possible pullback from their SPR buying as prices have gone up. Chinese SPR statistics is non existent and is very difficult to say how much of the elevated crude imports the past 4 months was SPR buying.
Despite the low crude imports, product exports surged as new refineries like the 400KBD Hengli was fully up and running. The March product export at 7.21 million tonnes was the highest monthly number since 2012. The Q1 refined product exports is up almost 15% y-o-y. There is no product breakdown for March yet and we should get those numbers in 10 days time. Any continued increase in product exports is bearish Asian refining margins since bulk of Chinese product exports remains in Asia.
On Friday, Brazil’s Bolsanoro halted a diesel price rise despite an uptick in crude oil prices. Last year, a trucker strike brought Brazil to its knees and as Brent is now above $70 there will be pressure on the Brazilian President and he doesn’t want a repeat of last year. However, halting this price rise will be bad news for Petrobras as they must foot the increasing subsidy. Share price in Petrobras was down 7% on this news, but this move will be bullish Brazilian demand. Brazilian diesel demand has a made strong start this year after a disappointing 2018.
We also had the latest Norwegian production data from the Norwegian Petroleum Directorate (NPD). Norwegian data has disappointed in Q1. The March production numbers came at 1.396MMBD which is down 8% yr-on-yr. The dotted line is the NPD forecast for the rest of this year, production will hits the lows in June due to field maintenance but production ramps in Q4 as new fields come online.
EIA released their drilling productivity report yesterday evening and unsurprisingly Permain efficiency went up yet again. Production per rig in the Permain is expected to go up to 650 barrels/day in May (compared to 618barrels/day in April). Permian will be producing 4.136MMBD in May which is more than combined production of Nigeria, Angola and Venezuela.
Permian is one of the main reasons behind the huge $50 billion deal when Chevron announced to buy Anadarko Petroleum. Chevron is very bullish on Permian acreage and will continue to focus on this region as they divest their international assets. Buying Anadarko will get them more premium acreage in the Delaware basin. Their monthly production numbers continues to beat previous estimates and with further cost synergies with this deal, we can expect even further efficiency gains.
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