Global Oil Market - October 5
Posted: Sat Oct 05, 2019 8:39 am
My October 5 podcast is now on the EPG website.
Oil prices edged higher on Friday, after slumping more than 2% on Thursday pressured by persistent worries about global oil demand and increased fears that an unresolved trade dispute between the world´s two biggest economies could drag the global economy into a recession. US crude oil recovered from a near two-month low increasing over 0.8% to close at $53.04 per barrel on October 4. Historically, Crude oil reached an all time high of 147.27 in July of 2008 and a record low of 9.75 in April of 1986.
Comments below are from Raymond James
This week's EIA petroleum inventories update was mixed relative to consensus.
"Big Three" petroleum inventories (crude, gasoline, distillates – including SPR) rose by 0.5 MMBbls, versus consensus estimates calling for a build of 0.6 MMBbls. Turning to crude, total inventories rose by 3.1 MMBbls, versus consensus calling for a build of 2.0 MMBbls and a normal seasonal build of 0.3 MMBbls. Refinery utilization fell to 86.4% from 89.8% last week. Total petroleum product demand decreased 2.0% after last week’s 4.5% increase. On a four-week moving average basis, there is a 2.1% y/y increase in total demand.
Since the mid-year escalation of the U.S.-China trade war (with still no signs of near-term resolution), oil prices have weakened due to the negative macro sentiment, with day-to-day choppiness dominated by demand-related fears. Last month’s stunning oil supply disruption in Saudi highlighted the vulnerability of supply to geopolitical risk, spurring a record-sized oil market rally – but followed by a similarly sharp pullback to pre-attack levels. Even setting aside the Saudi situation, the fundamentally bullish supply side of the equation is largely being overlooked:
> the larger U.S. producers are exhibiting restraint in capital allocation and U.S. well productivity improvements are slowing down;
> OPEC plus Russia’s production cuts – in place through March 2020 – are noticeably contributing to inventory draws;
> U.S. sanctions against Iran continue to be impactful; and
> IMO 2020 is looming three months from now.
The 12-month futures strip ($52.07/Bbl for WTI and $57.03/Bbl for Brent) shows modest backwardation for both Brent and WTI; for comparison, our 2019 forecast is $62.50 WTI/$71.00 Brent and the 2020 forecast is $92.50 WTI/$100 Brent.
There remain several key question marks, such as: 1) on the bullish side, the possibility of supply disruptions above and beyond the current ones, most notably a potential scenario of military escalation vis-à-vis Iran, and 2) on the bearish side, visible indications of global macro slowdown and resulting read-through for oil demand.
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MY TAKE: Traders are fixated on the demand side. Yes, IEA is likely to lower their global demand forecast a bit, but EIA and IEA seem to be blind to the fact that the U.S. active drilling rig count is too low to hold U.S. production flat. OECD oil inventories are below 30 days of supply and they will be going lower. The situation with Iran has not been resolved and it could flare up without notice; just as it did three weeks ago.
Oil prices edged higher on Friday, after slumping more than 2% on Thursday pressured by persistent worries about global oil demand and increased fears that an unresolved trade dispute between the world´s two biggest economies could drag the global economy into a recession. US crude oil recovered from a near two-month low increasing over 0.8% to close at $53.04 per barrel on October 4. Historically, Crude oil reached an all time high of 147.27 in July of 2008 and a record low of 9.75 in April of 1986.
Comments below are from Raymond James
This week's EIA petroleum inventories update was mixed relative to consensus.
"Big Three" petroleum inventories (crude, gasoline, distillates – including SPR) rose by 0.5 MMBbls, versus consensus estimates calling for a build of 0.6 MMBbls. Turning to crude, total inventories rose by 3.1 MMBbls, versus consensus calling for a build of 2.0 MMBbls and a normal seasonal build of 0.3 MMBbls. Refinery utilization fell to 86.4% from 89.8% last week. Total petroleum product demand decreased 2.0% after last week’s 4.5% increase. On a four-week moving average basis, there is a 2.1% y/y increase in total demand.
Since the mid-year escalation of the U.S.-China trade war (with still no signs of near-term resolution), oil prices have weakened due to the negative macro sentiment, with day-to-day choppiness dominated by demand-related fears. Last month’s stunning oil supply disruption in Saudi highlighted the vulnerability of supply to geopolitical risk, spurring a record-sized oil market rally – but followed by a similarly sharp pullback to pre-attack levels. Even setting aside the Saudi situation, the fundamentally bullish supply side of the equation is largely being overlooked:
> the larger U.S. producers are exhibiting restraint in capital allocation and U.S. well productivity improvements are slowing down;
> OPEC plus Russia’s production cuts – in place through March 2020 – are noticeably contributing to inventory draws;
> U.S. sanctions against Iran continue to be impactful; and
> IMO 2020 is looming three months from now.
The 12-month futures strip ($52.07/Bbl for WTI and $57.03/Bbl for Brent) shows modest backwardation for both Brent and WTI; for comparison, our 2019 forecast is $62.50 WTI/$71.00 Brent and the 2020 forecast is $92.50 WTI/$100 Brent.
There remain several key question marks, such as: 1) on the bullish side, the possibility of supply disruptions above and beyond the current ones, most notably a potential scenario of military escalation vis-à-vis Iran, and 2) on the bearish side, visible indications of global macro slowdown and resulting read-through for oil demand.
--------------------------------
MY TAKE: Traders are fixated on the demand side. Yes, IEA is likely to lower their global demand forecast a bit, but EIA and IEA seem to be blind to the fact that the U.S. active drilling rig count is too low to hold U.S. production flat. OECD oil inventories are below 30 days of supply and they will be going lower. The situation with Iran has not been resolved and it could flare up without notice; just as it did three weeks ago.