EXECUTIVE SUMMARY

Crude oil market is trading in very narrow range again in anticipation of stocks rebalancing. Long awaited crude oil storage levels drawdown have been finally happening for several weeks in the USA and it stimulated return of hedge funds long positions to crude oil futures and options market. Additionally U.S. gasoline demand looks much stronger comparing to May and June period of worryingly low numbers in EIA weekly data. 

Late August crude oil price was additionally impacted by the strongest hurricane in Gulf of Mexico for the last 12 years. Firstly price reaction on disaster was positive leading by surge in gasoline price due to refinery capacities closures. About 4 mln bbl / d of refinery capacities (20% of total U.S. refineries) were taken off and 10% of this amount could not return to work for a while after the hurricane passes.  Then expectations of drop in demand in the region overwhelmed production stalling (about 300 thsd bbl / d both offshore in the Gulf and onshore in Eagle Ford, Texas. Goldman Sachs estimates more than 700 thsd bbl / d loss in demand for the month. 

In its monthly report, the IEA revised down its global demand estimation for 2016 by 0.4 mln bbl / d. "The impact of carrying this lower demand base into 2017 against unchanged supply numbers is that stock draws later in the year are likely to be lower than first thought," the IEA said. The agency cut projections for the amount of crude required from OPEC this year and next by about 400,000 barrels a day. About 32.6 million barrels a day will be needed from the group this year, less than the 32.84 million it pumped in July. There are also growing doubts that all the countries involved in the accord to reduce supply are fully committed. Stocks remain 219 million barrels above a 5-year average - a level that OPEC is targeting with its output cuts.

Hurricane season brought some huge disturbance to the market, which has finally showed signs of strong rebalancing for several weeks.

1) Firstly, oil products prices surged on refineries shut downs. High gasoline prices could deteriorate estimated growth of demand in the nearest future.

2) Additionally, lost in demand due to infrastructure damage and logistic inability to deliver oil from Gulf to Latin America, for an instance, as the USA is a large exporter of oil products (about 4.5 mln bbl / d of oil product exports).

3) Reopening of refineries in Gulf will take some time, while import terminal can be open soon for about 50 crude oil tankers waiting to unload 20-40 mln bbls. U.S. crude oil storage levels should be quite higher in the weeks ahead.

4) Brent broke through its multi-year resistance, but WTI looks weak still. The spread between November futures widened to almost $6 per barrel. It means U.S. crude oil supplies have become much more attractive in Europe and after hurricane is ended Brent will likely see a correction.    

The first EIA weekly petroleum report after hurricane Harvey announced surprisingly high crude oil imports (7083 thsd bbl / d) on the week ended September 1. It is strange, because exports were almost zero and more than 20 mln bbls of crude oil in tankers in Gulf are yet to be unloaded. Crude net imports were 6930 thsd bbl / d, lower by just 73 thsd bbl / d than a week ago.  Imports from OPEC top 7 nations increased by 168 thsd bbl / d to 2427 thsd bbl / d due to Nigeria enhanced supplies. Particularly, imports from Saudi Arabia declined by 66 thsd bbl / d to 719 thsd bbl / d (-9.1%), Venezuela also lowered imports to 510 thsd bbl / d (-62 thsd bbl / d or -10.8%), Iraq imports plunged to 240 thsd bbl / d (458k -218 thsd bbl / d or -47.6%) and Nigeria raised its supplies by 397 thsd bbl / d to 469 thsd bbl / d.

U.S. production marked huge drop by 749 thsd bbl / d on the week ended September 1 (the same numbers that exports plunged).  

China’s crude oil imports rose 3.4% in August from the same month a year earlier but slid to their lowest monthly level since January, data from the Chinese General Administration of Customs showed, as some independent refiners closed for longer-than-expected maintenance amid a wave of government environmental inspections. According to Reuter’s Shandong-based refinery sources, a string of independent refiners, known as ‘teapots’, in eastern Shandong province carried out planned repair work in the July-August period before the peak demand season in September-October, said. Some were shut longer than planned because of safety problems detected in checks by central government environmental authorities. However, imports for the first eight months combined rose 12.2% from the same period a year ago to 281.05 mln tones, or 8.44 mln bbl / d.

Meanwhile data showed China’s refined fuel exports expanded 24% to 4.6 mln tones in August from a year earlier. Exports were up from 4.55 mln tones in July, supported by firm export margins. Refined fuel imports gained 35.1% in August versus a year ago at 2.73 mln tones.

The next ordinary OPEC meeting is planned on November 30. There will be a lot of speculations around it as usual. Whether extension of the deal for another 3-6 months will be discussed or not there is no any certainty now. For an instance, Russian Energy Minister Alexander Novak said that it is too premature to decide on extending the global deal to reduce oil production as the oil market had been rebalancing.

Download PDF

14 September 2017, Arbat Capital

oil, investment, equity

Read more