Oil prices rose sharply earlier in the week after the new Saudi Energy Minister confirmed that his arrival would not change OPEC policy. Prince Abdulaziz told reporters: "There is nothing radical in Saudi Arabia. We all work for the government … Basically, the energy policy of Saudi Arabia is resting on some pillars. The columns do not change. "
The comments seemed to reassure oil traders who are nervous that the recent Saudi move to an IPO from Aramco could lead to a breakup of relations within OPEC and a loss of motivation for the Saudis to take the brunt of the market equalization work. (We believe that this will only increase Saudi's determination to keep the market tight over the coming months.) The rise in oil prices was enough to push up global equities, as the energy sector in the S & P 500 up – an unusual event like The sector has lost 7% since mid-July, while the S & P has remained flat overall.
This was an unusual start to the trading week after several months in which oil traders focused more on bearish news. In the meantime, there has indeed been some negative news for the market in the form of a renewed downward revision by the IEA regarding the global growth in crude oil demand forecast for 2019 to just below 1 million bpd. The research organization had previously forecasted demand for 2019 growth of 1.4 million bpd for the year in the fall of 2018 and 1.35 million bpd by the spring of this year, reminding us all of a dimming global macro picture. These forecasts are also a bearish compliment to the year-on-year decline in demand for gas in the US and Europe, while demand for US refineries remains unchanged year-on-year despite GDP growth of more than + 2%.
From a technician's point of view, crude oil appears to be on a stable footing after recovering from a low of $ 55 on August 7 and lastly holding its low on last week's sell-off and currently trading over $ 62 , Brent crude is currently trading above its 50-day moving average for the first time in a month, suggesting bullish short-term momentum.
However, as we read the signs of recent market activity, we believe that most traders are looking for a sideward move in the near term while worrying about the downside risk over a longer period of time. On the options markets, for contracts dated January 2020, trading in 25 delta put options at a premium of 3% to 25 delta call options is measured against the implied volatility that traders pay for these options. For contracts dated December 2020, the same put options will trade at a premium of 6%. In the spread markets, the 6-month strip of Brent contracts will bring in 30 cents of contango per month from December 19th. Unfortunately, the same 6-month strip spread from June 20 brings just 15 cents contango per month. This is in line with the recent sale of crude oil derivatives by hedge funds, which have a 44% lower net long position on oil than in April.
While none of these figures "prove" that oil traders are feeling negative, they serve as meaningful indicators that refiners and traders who need to buy oil through spreads, producers who buy options to hedge their production, and speculative hedge funds raw do not feel overly positive.
– Brent crude traded above $ 62 this week again, supported by comments from the new Saudi Energy Minister, that they would further fuel OPEC's efforts to maintain market balance. While Aramco is heading for the IPO, we could ask the Saudis to work behind the scenes to further boost prices.
– President Trump dismissed national security adviser John Bolton from his staff on Tuesday, contributing, if anything, to a slowdown in oil prices. Mr Bolton was by far the Hawk consultant in Trump's team, and has repeatedly tried to tighten tensions with Iran. Oil sold around $ 1 when the news became public.
– Spread markets are bullish and may signal that physical markets are narrower than crude oil prices suggest. This week, Brent's quick 6-month spread offered more than 30 cents backwardation per month.
In relation to the election, mortgage company LendingTree conducted an analysis and concluded that Michigan has a higher chance of recession than any other state in the US. This is notable as Michigan was a key component of Trump's victory in 2016, suggesting that the Rust Belt could undercut the rest of the US. The Manufacturing PMI reached 49.1 points in August, the lowest level ever for the Trump administration.
– Global refining margins remained at a poor level this week, which is not good for a market that needs a boost in demand. The WTI 321 crack currently pays US $ 13.50 / barrel to US refineries, while the gas oil / Brent crack is trading at $ 17.50 / barrel on world markets.
– The leadership of OPEC's Equitorial Guinea said crude oil should fall in the range of $ 40 to $ 45 a barrel to allow the cartel to step up its supply-reduction efforts.
– Bloomberg reported that Aramco had heard of investment bank pitches in connection with the upcoming IPO in August. CEO Amin Nasser told reporters that the banks will be selected soon
– Hedge funds were net buyers of ICE Brent and net buyers of NYMEX WTI last week. The total net length between the two contracts is currently 410,000, 44% lower than in April.
DO Wrap Up
– US crude oil stocks fell 4.8 million barrels last week, rising 6% yoy in the last two weeks.
– Crude oil inventories at the Cushing, OK, delivery center fell by around 230,000 barrels to 40.1 million barrels for the sixth year in a row. Over the past two months, Cushing inventories have dropped 12 million barrels as crude oil stocks have flowed into the USGC for export.
– Traders shipped 6.9 million bpd overseas to the United States last year and relocated 3.1 million bpd of US crude oil overseas, leaving net imports of 3.8 million bpd.
– US crude oil production fell by 100,000 bpd w / w to 12.4 million bpd. The average production in 2019 was 12.1 million bpd.
– The US currently has a crude oil supply of 24.2 days, an increase of 7% over the previous year.
– In terms of demand, US refineries processed 17.4 million bpd last week. Demand averaged 17.45 million bpd in the last four weeks, a year-on-year decline of approximately 290,000 bpd.
– US gasoline continued to decline last week, dropping 2.4 million barrels to 230 million barrels. US gasoline inventories are about 0.5% lower year-on-year.
– In the US, there are currently 23.6 days of gasoline supplies available, a decrease of 3% over the previous year.
– Gasoline traded near $ 1.60 / kg this week, an improvement of 10 cents from last week as the US market recovered from hurricane conditions that reduced demand.
– Demand for US gasoline and exports was estimated at 10.29 thousand Bpd last week, which corresponds to a decrease of 310 thousand Bpd w / w. The implied mogas demand averaged 10.4 million bpd in August, up 165,000 bpd from the previous year.
– US distillate stocks also fell sharply, dropping by 2.5 million barrels to 134 million barrels. Distillate stocks have averaged 136 million barrels over the past four weeks, an increase of 4% over the previous year.