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Edward Bell - Commodity Analyst
Published Date: 03 November 2019
Oil prices closed the week with a bit of positive momentum on hopes that a US-China trade deal could be reached soon. Brent futures jumped more than 2.4% on Friday to settle at USD 61.69/b while WTI added 3.7% to close at USD 56.20/b. Commentary from China’s Commerce Ministry appears to have sparked the rally thanks to a “serious” conversation between trade representatives from both the US and China. However, oil futures still ended the week lower thanks to sluggish performance across much of the rest of the week.
Saudi Aramco has officially begun its IPO process, notifying the domestic exchange of its intention to list. We expect oil markets to fixate on Aramco news over the coming weeks including the publication of the company’s prospectus which may shed more light on production costs and outlook, dividend strategies and how the company plans to adapt in a world on the verge of a substantial energy transition away from oil and gas. Already the company has announced some changes in royalty schemes, lowering the rate to 15% from 20% on Brent prices below USD 70/b but raising it on higher price levels (45% on USD 70-USD 100/b and 80% on +USD 100/b).
We do not expect any change in short-term production policy from Saudi Arabia in response to the IPO and that Saudi Arabia’s commitment to the OPEC+ production cuts will remain in place. However, there is a risk that the oil market will need to find a new anchor dynamic once the Aramco IPO is finished. There had been an underlying ‘Aramco put’ supporting markets to ensure the valuation came in close to the government’s target USD 2trn. Once that is out of the way fundamentals will need re-exert their influence on oil.
Long-dated spreads in Brent weakened even as the front of the curve improved. Dec spreads (20/21 now than Dec 19 has expired) closed the week in a backwardation of USD 0.8/b, down from slightly more than USD 1/b a week earlier. WTI spreads also slipped over a similar time spread as supply conditions are still expected to be in surplus next year, even if a potential trade deal takes some negative pressure off demand. Dubai spreads (1-3mth) also slipped, closing last week in a backwardation of USD 1.73/b compared with more than USD 2/b a week earlier.
The US drilling rig count fell the second week running, down five rigs after last week’s sharp drop of 17. On an annual basis the rig count has declined by more than 180 rigs and is now at its lowest level since April 2017. Meanwhile, investors have moved back into long oil positions, adding more than 45k net long positions in WTI and nearly 11k in Brent last week. Nevertheless, after substantial unwinding in the last few weeks the long/short ratios in both Brent and WTI remain very narrow, implying any positive macro developments could unleash a substantial boost in interest.
Source: EIKON, Emirates NBD Research.