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Edward Bell - Commodity Analyst
Published Date: 01 September 2019
Oil markets could not escape the maelstrom that captured nearly all risk assets in August, with both Brent and WTI futures recording sizeable declines. Brent futures fell 7.3% for the month while WTI ended the month down almost 6%. A combination of new tariffs being imposed by China and the US, weakening data from major economies and uncertainty over the next steps from central banks all worked to weigh on the outlook for crude oil, particularly for demand in the coming months. Despite these major macro headwinds, oil prices managed a weekly gain as large inventory draws in the US helped to support prices.
OPEC production rose in August, thanks to higher output from Iraq and Nigeria and negligible declines elsewhere. Saudi Arabia’s production levelled off at 9.63m b/d, down only slightly month/month while output in the UAE was unchanged at 3.07m b/d, according to Reuters data. Compliance with the December 2018 production cut agreement remains high: collective compliance is at 135%, down from 162% a month previously. Saudi Arabia continues to enormously over-deliver, hitting 311% compliance with its targets, while the UAE is producing roughly exactly on target. Iran’s oil production was estimated at 2.1m b/d, down 1.45m b/d y/y as sanctions take their toll.
Forward curves in Brent and WTI strengthened last week as spot prices rose. Long-dated spreads in WTI and Brent showed wider backwardations: Dec 19/20 spreads for WTI closed the week at USD 3.29/b while in Brent they were at USD 2.34/b. Dubai spreads, however, narrowed: 1-3 month spreads closed the week at USD 1.8/b, down from USD 1.93/b a week earlier. Refined products prices in Singapore were roughly flat last week, keeping crack spreads more or less unchanged.
Investors took a mixed attitude toward crude last week. Brent net length rose for the first time since the end of July, up by almost 4k contracts as a 15k addition of new long positions outweighed more shorts being added. In WTI, however, net length fell by 24k lots as long positions were closed for a second week running. The long/short ratio in Brent is just 3.5, its lowest level since January this year.
In the US, the drilling rig count continued to fall, losing 12 rigs last week after declining by 16 in the previous week. The total count is now almost 120 rigs lower than it was a year ago. The next Dallas Fed energy survey will be out at the end of August and will give a better indication of how E&P companies in the US are navigating the impact of tariffs, hitting piping directly, and uncertainty over pricing. The US rig count may have been declining for most of the year but production in the US is heading in the opposite direction. Output hit 12.5m b/d in the week ending August 23, up 1.5m b/d y/y.
Source: Emirates NBD Research