oil oil oil

Crude oil focus on stocks, sanctions, and Florence

Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Brent crude oil has once again moved to within striking distance of the key area of resistance around $80/barrel. The bounce last week before even testing support at $75/b indicates how traders remain more concerned about the short-term outlook for supply than a potential future risk to demand from slowing emerging market growth.

This was also highlighted in recent weeks by the changed behaviour among leveraged funds. After cutting their combined bullish oil bets in Brent and WTI from a record 1.1 billion barrels to 666 million between February and August, they picked up 137 million barrels during the past couple of weeks. In its Monthly Oil Market Report for September, meanwhile, Opec highlighted the potential future risk to demand when saying that trade tensions, monetary tightening by central banks, and the financial problems of some emerging nations “constitute challenges to the current global economic growth trend.”

While not yet showing up in the official demand growth forecast for 2019, the cartel nevertheless said that “it will be essential to monitor the uncertainty in currency and financial markets.”
Crude oil
Source: Saxo Bank

The main driver of these supply concerns remains the US sanctions against Iran which have already started to have an impact on Tehran's ability to sell its crude abroad. This is forcing the return of floating storage with Bloomberg reporting that at least five Very Large Crude Carriers (VLCC) have anchored off the Iranian coast in the past couple of weeks.

Iran and Opec
Source: Bloomberg, Saxo Bank

Together with Russia, Opec producers with spare capacity are unlikely to make up the shortfall from Iran. This development is driven by the current divergence in the shape of the WTI and Brent crude oil curves. While Brent has seen the front end of the curve flip from contango to backwardation (from loose to tight supply) during the past month, WTI has only managed a general shift higher as the prompt price rallied.

This development has helped trigger a jump in Brent’s premium over WTI to $10/b.

Also driving the change has been the ongoing problems with bottlenecks within the US – something that has become increasingly painful for producers from the Permian shale region in Texas. Lack of pipeline takeaway capacity has triggered a deep discount between Permian oil and WTI crude oil. As a result, we are beginning to see production  growth slowing, something that led the Energy Information Administration in its latest Short Term Energy Outlook to cut US production growth both in 2018 and 2019. 

Crude oil
Source: Bloomberg, Saxo Bank

Apart from the EIA’s weekly update on stocks, production, and trade at 14:30 GMT, the market is also keeping a close eye on Hurricane Florence which is expected to slam into North Carolina this weekend. Potentially at risk is a disruption of the Caledonian pipeline, the main artery transporting fuel from the Gulf of Mexico refineries to the metropolitan East Coast. Any disruption could trigger a jump in gasoline and diesel futures given the risk to supplies into New York Harbour, the physical delivery point for RBOB and ULSD futures.

Hurricane Florence
Source: Bloomberg

Later today, as mentioned, the attention turns to the Weekly Petroleum Status Report from the EIA. Last night the American petroleum Institute reported a price-supportive 8.6 million barrel draw in crude stocks, somewhat higher than a Bloomberg survey pointing to a two million barrel drop.

EIA Petroleum Status Report

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.