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Oil Fundamentals Stay Bearish Regardless of Bullish Headlines

Oil costs acquired quite a lot of bullish headlines early this week as US/Iran tensions continued to boil, there was a modest thaw in US/China commerce relations and the ECB president instructed stories he’s prepared to chop charges if vital. OPEC+ additionally made headlines by making steps in the direction of cementing a provide reduce extension in July.

On the Iran entrance, this weekend’s assaults on oil tankers within the Gulf of Oman are understood by US intelligence to have come on the hand of Iran-linked personnel. Secretary of State Mike Pompeo and Nationwide Safety Advisor John Bolton have each publicly made hawkish feedback in the direction of Iran and the Iranians, in flip, have acknowledged they’ll start to complement uranium at increased ranges than what the JCPOA would have allowed. President Trump, in the meantime, has hinted that he is not going to hesitate to ship extra troops to the Center East to neutralize additional Iranian aggression whereas additionally noting that he, by no means, desires to hunt conflict with Iran (and batted down John Bolton in doing so.) He additionally described the oil tanker assaults as ‘very minor.’ Whereas a path to a serious US/Iran battle nonetheless seems murky, it does appear that either side appear to be locked in a harmful cycle of antagonization then response which makes a path to a stop in hostilities equally murky. For now, it’s exhausting to say far more than that this can be a vital oil market state of affairs which we have to proceed to observe.

As for US/China, Donald Trump despatched inventory markets hovering suggesting that he may have an in depth assembly with Xi subsequent week on the Japan-hosted G20. This was the primary cause for optimism on US/China commerce relations in a number of weeks and despatched the S&P 500 to a 6-week excessive whereas Shanghai Composite held on to latest positive factors. Whereas a close to time period commerce deal may be unlikely after two months of bickering, we nonetheless assume that Trump would like to make some form of cope with China that he can brag about on the marketing campaign path subsequent 12 months in a similar way to how he declared a commerce victory with Mexico regardless of no actual modifications in coverage. Additional complicating points is China’s media which has taken an more and more anti-American path so as to drum up assist for Xi in his ‘combat’ with trump.

On the central financial institution entrance, ECB President Mario Draghi instructed reporters that his central financial institution stands prepared with extra stimulus if international commerce weakens whereas US merchants are pricing in a fee reduce from the US Fed later at present. For all of the discuss of central financial institution stimulus serving to danger belongings, it’s value noting that on a relative foundation the US Fed has taken a extra hawkish stance than lots of their friends and the energy within the US Greenback has definitely been bearish for oil. Don’t search for that to vary this week as markets are already anticipating the Fed to loosen charges a bit.

Misplaced within the shuffle of this week’s information are the continued bearish fundamentals that are at the moment protecting a lid on costs. OPEC+ has fought extraordinarily exhausting to stability the market to this point this 12 months and failed miserably with US crude inventories increased by greater than 45m bbls in 2019. As we famous final week, maybe the very best cause to be bullish the market in the meanwhile is that hedge funds, banks and buying and selling teams all appear to be positioning in a particularly bearish posture the place a contrarian guess may pay properly. Going ahead, extra bullish headlines can be good. Precise stock attracts can be higher.

Fast Hits



– Brent crude rebounded to close $62.50 this week with assist from the aforementioned Iran, US/China, ECB and OPEC+ headlines. Brent futures are nonetheless decrease by about $eight during the last month.

– We’ve executed our greatest to cowl the soggy state of US crude fundamentals this 12 months and we illustrate this pattern with a chart of the immediate 1-month WTI unfold which is now in contango. This week a surge of barrels into the Cushing supply hub put stress on spreads.

– OPEC+ seems to be near lastly agreeing on the date of their subsequent assembly. It appears just like the cartel will be a part of forces in Vienna on July 1st and 2nd. We nonetheless count on the group to succeed in a brief time period cut price to increase their present manufacturing reduce regime. On an extended horizon, nonetheless, we expect that the huge distinction in Russian v. Saudi budgetary wants for crude oil may in the end make it exhausting for the 2 sides to cooperate.

– The US is sending 1,000 extra troops into the Center East so as to assist include latest aggression from Iran. Iran nonetheless utterly rejects that they had something to do with the assaults.

– Immediate brent spreads are literally transferring decrease this week regardless of the US/Iran pressure suggesting bodily merchants don’t see any provide shocks within the close to time period.

– Hedge funds proceed to dump oil contracts at a particularly aggressive tempo. Speculators reduce internet size in Brent to 292okay contracts final week – down 28% since early Might and reduce internet size in NYMEX WTI derivatives to 129okay for a 53% reduce since early Might.

– The latest calm in oil costs has run barely in distinction to some panicky geopolitical headlines. Choices markets should not ignoring the heightened potential for volatility with the NYMEX/CBOE WTI volatility index rallying to just about 50% this week.

– In the meantime, in fairness markets, latest rallies have the VIX subdued.

DOE Wrap Up



– US crude oil manufacturing moved barely decrease final week to 12.3m bpd and is averaging 12.1m bpd to this point in 2019 after averaging 10.8m bpd in 2018.

– The regularly excessive output helped generate yet one more crude oil inventory construct this time for about 1.8m bbls. General crude shares stand at 485.5m bbls and are increased y/y by 11% during the last four-week interval.

– The US at the moment has 28.eight days of provide of crude oil available which is 15% increased than the identical level final 12 months.

– Crude shares are additionally ballooning within the Cushing buying and selling hub and protecting a lid on WTI spreads. Cushing inventories jumped greater than 2m bbls final week to 52.9m which is their highest mark since December of ’17.

– Merchants imported 7.6m bpd final week and exported 3.1m bpd for a internet stability of 4.5m bpd of imports. Internet imports have averaged 4.2m bpd to this point in 2019.

– US refiners processed 17.1m bpd final week and have averaged 16.43m bpd of demand to this point in 2019 which is decrease y/y/ by about 230okay.

– US gasoline shares climbed about 800okay bbls final week to 234.9m and have elevated by greater than 6m bbls during the last 4 weeks. General gasoline shares are barely decrease y/y.

– US distillate gasoline inventories fell by about 1m bbls final week and are increased y/y by about 10% during the last 4 week interval.

– US gasoline demand + exports printed 10.4m bpd final week and are averaging 10.1m bpd during the last 4 weeks which is flat y/y. US gasoline consumption is decrease y/y by 75okay bpd to this point in 2019.

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