Short-term weakness belies crude oil’s strong long-term fundamentals

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Short-term weakness belies crude oil’s strong long-term fundamentals

crude-oil-derrick-sunsetWhile West Texas Intermediate (WTI) prices this week fell to below $45/bl, a two-month low, news this week that US crude inventories were down, failed to spark materially positive price movement.

“Some moderation over the significant gains oil saw from the third week in January onwards is to be expected,” Auspice Capital Advisors founder and chief information officer Tim Pickering told Mining Weekly Online in an interview.

He pointed out that the overall stockpiles were high in both the US and Canada, so the 2.2% stockpile decrease on a week-on-week basis represented just a small data point. While total North American storage remained high, other factors such as ‘Brexit’, slower economic growth in key markets such as China and the EU and a recent announcement from the Organisation of the Petroleum Exporting Countries (Opec) that it produced 240 000 bbl/d more crude in June weighed on oil prices.

Opec expected to lift output to 32.8-million in the third quarter.
“Opec is upping the ante on top of concerns over Brexit and slowing Chinese and EU demand in general, as they keep producing more and more,” he said, noting that the market was “not out of the woods yet”.

Oil had come a long way since January, with WTI rising about 100% to flirt around $50/bl-level the past few weeks, and Auspice’s Canadian Crude Index went from around $15.70 to $38 in the same timeframe, which represented a 140% increase. “Those are big moves and some moderation over that shouldn’t be overly surprising given that we still have a situation overall of more supply on a daily basis than demand,” he stated.

Canada also had significant volumes of oil in storage, even before the Fort McMurray wildfires at the beginning of May. Storage in Canada had grown significantly over the last few years to well over 30-million barrels, and pushing 40-million barrels.
For this reason, Puckering believed the WTI did not see a massive price spike in May, when more than a million barrels of Canadian crude came offline, as the significant amounts of oil in storage provided a good cushion.

STRONG FUNDAMENTALS
Pickering believed in strong fundamentals supporting a sturdier oil price in the long therm. According to him, the overall supply-versus-demand situation was about one- to two-million barrels a day – “not significant, and manageable”, he advised.

“Supply is coming down in North America where accounts are down – yes we have a lot in storage, but the right things are being done to restore the supply-demand balance. We remain very optimistic in the long term. Despite robust demand for crude oil globally, it could be a bumpy ride for the remainder of 2016, given so many unknowns such as Brexit and the US election, which are both things the market doesn’t deal very well with,” he advised.

Pickering believed that an oversupply situation was far better that a lack-of-demand situation. “A no-demand situation takes a lot longer to fix. Oversupply gets adjusted and supply comes off; people reduce production because it’s uneconomic; rig counts come down and it all responds quicker than increasing demand,” he explained.

Global crude demand was at a healthy level, with major economies such as India, which had become the fastest-growing economy in the world; China, despite a slowdown but still a big a part of the story; and the US market seemed healthy. Brexit was not going to change the crude market meaningfully, Pickering advised.

The largest risk factor to price upside would be erosion of demand from the world’s most significant markets, but Pickering did not see that happening.

CANADIAN CRUDE
While the crude market waited for strong fundamentals to push prices higher, Canada, the world’s fifth largest producer, would probably miss out on global market excitement.

“Canada’s issue is really simple, in that it only has only one buyer for its oil – the US,” Pickering said. Canada is also the largest exporter of oil to the US.

“The real issue from a fundamental perspective is that Canada needs to get its crude to tidewaters. Pipelines need to happen, but it’s not going to happen overnight,” he said referring to several stalled pipeline proposals to get Canadian crude out of the Alberta oil patch to port, and global markets.

A prime example: the National Energy Board on Friday announced that it had suspended a review of Enbridge’s request to extend its permit. The proposed pipeline would carry oil from the Alberta oil sands to a port in northern British Columbia for export.

A Canadian court had in June overturned the approval of the oil pipeline, delaying a project angrily resisted by environmentalists and several aboriginal groups. The NEB also said Friday it would suspend its review of any filings from Northern Gateway regarding compliance with the 209 conditions attached to the project.

The inadequate regional infrastructure was the main reason that the spread between the Canadian Crude Index and WTI had been averaging about $14/bl so far this year.

According to Pickering, the other side of the problem was market access – the ability for global inventors to participate in the Canadian crude market. “It had previously been a largely wholesale market, and if you or I had an opinion about it, we can’t express that,” Pickering explained.

For this reason, Auspice had committed to bring visibility to the Canadian crude market through its Canadian Crude Index that brought transparency and investment trading vehicles to the Canadian crude.

“We can go buy the WTI, the USO ETF [United States Oil Fund] and get exposure to the WTI, or you can buy WTI futures, but there’s no way to do that for Canadian exposure. Auspice aimed to change that with the launch of its Canadian Crude ETF. The company had now licenced the index and ETF products to United States Commodity Funds, the same team that put together the renowned USO product.
“That’s a real sign that global participants want access to Canadian crude, which is exciting,” he noted.

MISSED OPPORTUNITY
Meanwhile, Pickering pointed to a recent report on crude exports by Pira Energy Group, noting that since the US opened its borders to crude exports in December, the increase in exports had been better than expected.
National Bank numbers for May suggested that exports were 200 000 bbl/d higher than the initial Pira estimate.

“The implication is that the US had now been able to get more of their crude to tidewater and to global markets, narrowing the spread between US crude prices and global waterborne crude prices. That is a perfect example of how this could go for Canada if we could get access for our oil to tidewaters. That spread between Canadian crude and WTI would narrow,” Pickering said.
Source: MiningWeekly

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