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Edward Bell - Commodity Analyst
Published Date: 14 July 2019
Oil markets were boosted by disruptions to supply in the Gulf of Mexico as Tropical Storm Barry shuts-in 1.1m b/d of production and persistent concerns over geopolitical risks in the Middle East kept security of supply in focus. Brent futures ended the week up 3.9% at USD 66.72/b while WTI gained 4.7% to finish the week at USD 60.21/b. For reference our Q3 forecasts for average prices in Brent and WTI are USD 67.50/b and USD 60/b respectively.
Both the IEA and OPEC released their monthly market outlooks last week and neither made for particularly comfortable reading for OPEC producers. Both institutions point to strong non-OPEC supply growth extending into 2020 with the IEA expecting growth of 2.1m b/d in 2020 from non-OPEC sources, an acceleration on the pace of growth for this year. With such a strong supply pace of growth amid demand constrained by a slowing global economy, the IEA cautioned that the extension of OPEC+ cuts into Q1 2020 provide “guidance but it does not change the fundamental outlook of an oversupplied market.” Inventory builds look all but certain the coming months, which supports our view of weaker prices by the end of the year. As the call on OPEC crude narrows in 2020, producers in the bloc face a challenge of keeping cuts in place for minimal upside in prices while bearing the cost of slower domestic growth and limited fiscal flexibility.
Time spreads were roughly unchanged at the front of the curve last week even as front month futures managed to rise. Despite the warning of a surplus in Q1 2020 longer dated spreads managed to widen their backwardation in both Brent and WTI. Dec 19/20 spreads in Brent rose to USD 2.81/b and in WTI the spread widened to USD 3.32/b. Dubai spreads have started to widen again as geopolitical uncertainty over flows of crude from the Gulf region supports the market. The harassment of a British tanker last week is the latest incident in the region beset by rising geopolitical risks.
Despite the apparent risks to international crude markets, investors continued to close long Brent positions. Net length has now fallen eight weeks in a row, taking the long/short ratio to 4.4, its lowest level since January this year. Meanwhile, four weeks in a row of inventory draws in the US seems to have convinced investors to expand net long WTI positions.
Products markets look to be making the most of crude prices held in their current ranges as margins for gasoline and fuel oil have jumped to start Q3. Headline refining margins for gasoline in Singapore are at their highest level since April this year while fuel oil cracks are firmly in positive territory. New, lower sulphur fuel oil is being marketed by refiners as they curtail production of higher sulphur grades ahead of the introduction of IMO 2020 rules next year. Risks to Gulf supplies will also support fuel oil margins in the short term. This near-term surge at the bottom of the barrel may persist as the market settles on new benchmarks for fuel oil prices.
Source: EIKON, Emirates NBD Research
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