Article / 13 September 2017 at 13:04 GMT

Oil rallies on upbeat reports from Opec and IEA —#SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Crude oil prices up on supportive reports from Opec and IEA
  • IEA sees healthy outlook for global demand growth in 2017 and 2018
  • Oil market is likely to remain rangebound, with price risk skewed slightly upward
  • 2018 global supply/demand balance shows Opec with no room to boost output
  • Potential break of downtrend from February at $49.30/b could trigger an extension
  • EIA's weekly petroleum status report at 1430 GMT likely to be another volatile report

Oil storage tanks
 Oil markets await another weekly report on crude oil stocks from the EIA. Photo: Shutterstock

By Ole Hansen

Crude oil is trading higher ahead of what is likely to be another volatile weekly status report from the US Energy Information Administration. Monthly oil market reports from Opec and the International Energy Agency have painted a rosier picture for oil, with demand growth rising and the global overhang of oil and fuel supplies beginning to approach the long-term trend. 

Below we highlight some of the recent developments pointing towards a healthier market. Overall the market is likely to remain rangebound for the foreseeable future, but with the price risk is skewed towards slightly higher prices.

A potential break of the downtrend from February at $49.30/barrel could trigger an extension, but probably not a continued rally.

WTI crude oil future (CLc1)
WTI Crude oil
Source: Saxo Bank 

Opec and non-Opec (primarily Russian) supply cuts initiated last year have begun reducing the global overhang of supply. Opec pumped 32.76 million barrels per day last month according to the cartel's latest Monthly Oil Market Report. Based on the projected global supply/demand balance for 2018, Opec would be required to supply 32.8 million barrels/day. On that basis, there is no room to increase production, and the only conclusion is that the group will be forced to extend the current production curbs deal beyond March.

Such a decision may cause internal problems as some producers are desperate to increase production and revenues. But the risk that failure to extend could send prices sharply lower should ensure its safe passage. 

The International Energy Agency in its Oil Market Report today saw a healthy outlook for global demand growth for both 2017 and 2018. At the same time, the IEA saw the global overhang of oil and fuel converging towards the longer-term average. 

A WTI crude oil price at or below $50/b has hurt US shale oil producers' ability to continue ramping up production. The EIA sees US production averaging 9.3 million barrels/day in 2017 and rising to average 9.8 million bpd in 2018, a small reduction from recent updates.

The gap between weekly estimates and monthly data on US oil production widened between March and June. The more authoritative monthly data showed no production increase during that period, while the weekly data has remained on a steady rising trend. Given the price weakness in the past few months, we believe the monthly data paints a more accurate picture.

US crude oil production
Hurricane Harvey has created a short-term overhang of crude oil stocks, which needs to be reduced. Oil demand tends to drop in September and October as refinery activity slows. So far this has not been seen as Harvey has kept refinery activity elevated due to strong margins.
Backwardation in Brent is consistent with a tightening global oil market, while contango in WTI is consistent with local oversupply of crude as a result of refinery shutdowns and the closure of export terminals. As a result, Brent's premium over WTI has risen to more than $5/b.

Once the impact of hurricanes begins to fade, we should see the spread start to narrow, but whether it is Brent falling towards WTI or WTI rising towards Brent, or a combination of both, remains to be seen.

Brent and WTI spreads

Next up at 1430 GMT is the EIA's weekly Petroleum Status Report. Just like last week, this report will continue to show the Hurricane Harvey impact on stocks, import/export and production.  

EIA survey and recent results
Last week saw a dramatic set of numbers, which highlighted the impact of Harvey on the Texan Gulf Coast, a region which, in an energy perspective, the IEA regards as almost as important as the Strait of Hormuz: "For a long time it has been a production and refining hub; today it is an important global trading centre with more than 4 mb/d of products and 0.8 mb/d of crude oil being exported.With US export volumes expected to increase, the strategic importance of the Gulf Coast will only grow. The rise of the Gulf Coast as a major energy hub means that, in some respects, it can be compared to the Strait of Hormuz in that normal operations are too important to fail."

Some of last weeks major changes
EIA charts
Updates will be posted below once the inventory report is out.

With the market currently focusing on the supportive news provided by industry bodies, it is worth keeping in mind what could go wrong and subsequently send prices lower again.

We are somewhat worried about the recent slowdown in the global credit impulse, not least in China, and whether this could be an early sign of a global economic slowdown over the coming months. 

Other factors that could knock oil prices include:
• China’s accumulation of strategic reserves slows
• Opec/non-Opec fails to extend production cuts beyond March
• Accelerated shift to electric vehicles and continued efficiency gains in regular combustion engines
• Hedge fund accumulation of bullish bets overextends and triggers another period of long liquidation

— Edited by John Acher

 Ole Hansen is head of commodity strategy at Saxo Bank

Ole Hansen Ole Hansen
A monster draw in gasoline stocks of 8.4m barrels (biggest since 1990) while crude oil stocks 'only' jumped by 5.9m barrels as imports declined and export rose. Total US inventories of oil and fuel still managed to rise despite the drop in fuel stocks. Result and market reaction attached
Ole Hansen Ole Hansen
Giorgos Giorgos
Hello Ole , Harvey gave some trading opportunities , i am now in the WTI Brent spread trade and before that i noticed a huge spread on October gasoline contract and January contract because of the October future rally . Started trading at 25 cents and now is less than 10 ...unfortunately i was very early out (18 cents) due to the lack of historical data for this kind of spread.


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