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Edward Bell - Commodity Analyst
Published Date: 09 September 2018
Oil markets slipped last week as the impact of a tropical storm hitting production facilities in the US Gulf of Mexico was minimal and a sell-off in emerging markets and further trade disputes between the US and China weighed on overall market sentiment. Brent futures fell by less than 1% to close the week at USD 76.83/b while WTI fell nearly 3% and ended the week at USD 67.75/b. On a technical basis, WTI looks at risk for more downside in the short-term as short scale moving averages encroach on longer ones; a downside target for WTI is a move to a USD 65/b handle.
This will be a heavy week for oil market forecasting agencies. The EIA publishes its Short-Term Energy Outlook on 11 September with its projections for US oil supply under heavy scrutiny. In its last outlook the EIA cuts its 2018 US supply growth projection to 1.31m b/d and kept its outlook for 2019 steady at slightly more than 1m b/d. The IEA and OPEC also publish their outlooks later this week and markets will focus on whether they address the current sell-off in emerging markets. We don’t expect that currency weakness in several EMs will pose a risk to oil market fundamentals as the weakness in both India and China, the two markets most vital from an oil market perspective, has been relatively contained (see our note from 6 September for more details).
Forward curves moved in opposite directions last week although both the Brent and WTI curves remain in backwardation. The 1-2 month spread in Brent is now at USD 0.35/b, its widest level since July this year while in WTI the corresponding spread has narrowed to USD 0.2/b. The same story holds true for longer-dated spreads as well.
Drilling activity slipped last week in the US as two rigs were taken out of operation, unwinding the previous week’s gain. Investors have largely turned positive again on crude futures and options, likely welcoming the return of backwardation to the Brent curve. Speculative net length in Brent rose by 27.7k contracts last week and WTI added more than 16.6k contracts. However, in both benchmarks some new short positions were added.
US inventory data was delayed one day thanks to a public holiday in the US at the start of the week. Total crude stocks fell by more than 4.3m bbl, larger than the market had been anticipating. However, there were solid builds across the rest of the barrel. Refinery demand ticked up to 96.6% utilization, well above its five-year average even as refinery margins—particularly the RBOB/WTI crack—weakened last week. Headline margins for Singapore refiners were relatively flat in gasoline last week while the plummet in fuel oil prices continues. The East/West fuel oil arb has narrowed to USD 26/tonne, its lowest level since early July.
Source: EIKON, Emirates NBD Research.
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