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Edward Bell - Commodity Analyst
Published Date: 24 March 2019
The rally in oil prices took a breather last week as more negative data reinforced the soft outlook for growth this year and there were few oil-specific catalysts to shift markets. Brent fell marginally over the week after touching 2019 highs of USD 68.69/b. The international benchmark ended the week at USD 67.03/b, down 0.2%. WTI fared better, closing the week up just shy of a gain of 0.9% at USD 59.04/b after earlier rising above USD 60/b. WTI failed to close above the USD 60/b handle which would appear to be the next psychological barrier for the US grade to push through.
Weak factory data in the Eurozone and US along with a more dovish Fed set up a poor headline demand story for crude in 2019. We noted in previous reports that any boost to commodities from the Fed holding rates steady (and consequently leading to a lower USD) would be ephemeral as any easing of monetary policy would reflect central banks trying to soften a slowdown in growth. With OPEC choosing to skip its April meeting we expect production patterns to follow a similar path as they’ve already done so far in 2019 with relative over-compliance from Saudi Arabia to make up for others missing their targets.
The relative out-performance of WTI to Brent showed up in time spreads last week. Backwardation in WTI Dec spreads widened at a faster pace compared with Brent with WTI Dec 19/20 closing at USD 2.28 (up nearly 15% w/w) while in Brent the same spread gained just 0.5% to close at USD 1.9/b. The contango at the front of the WTI curve continued to weaken last week, compressing five weeks in a row for the 1-2 month spread. Meanwhile backwardation in Brent in the same spread widened by USD 0.16/b last week to close a little under USD 0.3/b.
The sustained backwardation in Brent and pending shift in the curve in WTI has drawn speculators into the market over the last few weeks. Net length held by managed money in WTI positions rose by more than 50k contracts last week while in Brent speculative positioning rose by 15.9k lots. With broader economic data coming in more negatively and volatility still surrounding the outcome of Brexit there may be an element of profit taking from recent highs in oil that could see positions pared down as we head to month- and quarter-end.
The US drilling rig count fell a fifth week running, losing nine rigs last week. The rig count has fallen by more than 60 rigs since the start of 2019 and is only 20 rigs higher than it was a year ago. The Dallas Fed’s energy survey will be released in the middle of the week and will give an indication at which price point exploration and development companies, particularly in the Permian, are using to plan capital spending and maintenance expenditure. Thanks to productivity gains, capex plans have been held around USD 50/b for the last three years. If those capex breakeven levels are sustained into 2019, current WTI pricing still provides some headroom for production to keep growing this year.
Source: EIKON, Emirates NBD Research.