It’s easy to see the relationship. As the average Brent crude price has fallen since 2014, Chinese restocking has surged, jackknifing higher in 2016.
“The latest data released for China show the nation’s implied crude stock building rate accelerating to 1.1 mb/d [million barrels per day] for the month of August,” said Miswin Mahesh and Michael Cohen, commodity analysts at Barclays.
“The stocking rate is higher than the year-to-July rate of 780 kb/d, and the 440 kb/d averaged over June and July. The jump in August is a result of teapot refineries re-stocking, refinery maintenance, completion of storage facilities as well as the low oil price environment.”
“Teapots”, as they are are known, are independent oil refineries operating in the country, and account for around 20% of China’s refining capacity.
On the last factor — cost — Mahesh and Cohen found that the pace of inventory restocking is strongly linked to Brent prices, both from a monthly and yearly perspective.
“Since the price fall in 2014, China’s implied crude stock build has increased significantly. On a monthly basis, it appears that $50/bbl Brent is a key price level, below which implied crude build tends to remain at elevated levels,” they say.
This chart from Barclays plots monthly changes in Chinese crude inventories versus changes in the average Brent price. It’s clear what levels the Chinese are buying at.
And Mahesh and Cohen believe stockpiling will continue as the government strives to meet its 2020 target of 90-100 days of net import cover, something that currently sits at just a third of that level, according to Barclays.
“We see crude oil stocking rates by China averaging at least 400 kb/d over Q4 2016 and 2017, and our analysis suggests that the pace of China’s stocking activity will be linked to the price of oil rather than the completion dates of its Strategic Petroleum Reserve (SPR) sites,” they wrote.
US oil settles at $45.34 a barrel, up $1.29, or 2.39%
Oil prices were up as much as 3 percent on Wednesday after a surprise drop in crude stockpiles reported by the U.S. government, marking a third weekly decline in the closely watched data.
Prices were slightly higher after the Federal Reserve said it would leave interest rates unchanged. The dollar fell after the announcement, making dollar-denominated commodities, such as crude oil, more affordable to holders of other currencies.
The U.S. Energy Information Administration (EIA) said domestic crude inventories fell by 6.2 million barrels for the week ended Sept. 16, versus a 3.4 million-barrel drop forecast by oil market analysts polled by Reuters.
Crude stocks in the world’s largest oil consumer have fallen since this month began. Some 14.5 million barrels were reported drawn for the week ended Sept. 2, the biggest weekly drop in 15 years after a tropical storm that slowed the arrival of oil imports in the U.S. Gulf Coast. In the subsequent week to Sept. 9, there was another decline of 559,000 barrels.
Crude inventories down 6.2M barrels
While the draws have put a bullish face of sorts on oil, they also contrast with surging production from OPEC and other major producers such as Russia, causing a swing in crude prices lately.
“We are still very well supplied for this time of year,” said Tariq Zahir, trader in crude oil spreads at Tyche Capital Advisors in New York.
Some market participants were puzzled by the U.S. crude draw when imports as a whole rose and refinery runs fell.
U.S. crude imports rose last week by 77,000 barrels per day, but the rate dropped sharply in the U.S. Gulf, falling about 500,000 bpd to 2.9 million bpd, close to the record low of 2.5 million bpd hit in the week to Sept. 2 when the storm disrupted supplies.
Refinery crude runs fell 143,000 bpd as utilization rates fell 0.9 percentage point but were still high at 92 percent of total capacity.
U.S. gasoline futures rose 2 percent after data showed stocks of the motor fuel fell 3.2 million barrels nationwide, compared with analysts’ expectations for a 567,000-barrel drop.
That contrasted with record builds in the Gulf Coast and record draws in the East Coast, amid a near two-week outage on a key gasoline line that runs from the refining hub in the south to northeast. The line was to reopen on Wednesday.
“The Colonial pipeline mess is evident in the gasoline data, which showed supplies stranded in the Gulf and drawn down in the East. We will have to see if the trends normalize next week,” said John Kilduff, partner at New York energy hedge fund Again Capital in New York.
OPEC is a toothless tiger: Expert
Adding to the upward price momentum was an oil service workers strike in Norway that could impact output from western Europe’s biggest crude producing region.
Key for the market is next week’s meeting in Algeria between producers from the Organization of the Petroleum Exporting Countries (OPEC) and Russia to discuss measures to rein in oversupply, including an output freeze at current levels, but analysts said they did not expect significant results.
“Even with a freeze — which would still mean OPEC production is at record levels — we will still be in an oversupplied market,” said Matt Stanley, a fuel broker at Freight Investor Services (FIS) in Dubai.
Oil prices initially fell in the previous session on pessimism that OPEC members and other major crude producers will reach an output freeze deal during Sept. 26-28 informal talks in Algeria. Saudi Arabia, Iran, Iraq, Nigeria and Libya, five of OPEC’s largest oil exporters, have all raised or been trying to hike output in recent months even while talking of a freeze.
But at midday, short-covering and fresh buying emerged from traders who feared a rally if OPEC announce a deal in Algeria.
OPEC Secretary-General Mohammed Barkindo said he expected the potential freeze deal between OPEC and other producers to freeze output to last one year, longer than previously thought.
Oil prices fell as much as 3 percent on Tuesday after a series of gloomy predictions on demand growth that suggested the global overhang of unused inventories may persist for longer than anticipated.
The International Energy Agency, which advises oil-consuming countries on their energy policies, said a sharp slowdown in oil demand growth, coupled with ballooning inventories and rising supply, means the market will be oversupplied at least through the first half of 2017.
This contrasts with the agency’s last forecast a month ago for supply and demand to be broadly in balance over the rest of this year and for inventories to fall swiftly.
The IEA’s comments follow a surprisingly bearish outlook from the Organization of the Petroleum Exporting Countries on Monday that also pointed to a larger surplus next year due to new fields in non-member countries and as U.S. shale drillers prove more resilient than expected to cheap crude.
Low oil price not enough to adjust fundamentals: Pro
“It seems the situation has deteriorated strongly in the eyes of OPEC as well as the IEA,” Commerzbank head of commodities strategy Eugen Weinberg said.
“I wouldn’t be surprised to see this price weakness continue for a while right now, because that was not on the cards, in our opinion.”
A stronger dollar also weighed on crude and other commodities denominated in the greenback, making them less affordable to holders of currencies such as the euro. U.S. equity markets fell more than 1 percent, adding to the bearish sentiment.
Upbeat Chinese data on industrial output growth for August failed to lift oil prices as the crude market remained in a profit-taking mode, traders said. China’s industrial output grew the fastest in five months as demand for products from coal to cars rebounded thanks to higher government spending and a year-long credit and property boom.
Speculators in U.S. and Brent crude futures took an axe to their long positions in the latest week, cutting the combined net speculative length in the two contracts by 80 million barrels, according to PVM Oil Associates.
Reducing oil expectations
Analysts expect U.S. government data on Wednesday to show a stockpile build of 4.5 million barrels in crude last week. The American Petroleum Institute, a trade group, will release its own preliminary supply-demand report for last week at 4:30 p.m. (2030 GMT) on Tuesday.
Oil prices rose in the previous session after uncertainty over a potential U.S. Federal Reserve rate hike in September weighed on the dollar.
Even so, expectations of U.S. monetary tightening before the end of the year, along with the bleak demand outlook projected by the IEA, further diminished market optimism that the world’s largest oil producers might agree to freeze output when they meet for talks in Algeria on Sept. 26-28.
“The idea of an oil production freeze makes even less sense if demand falls apart while U.S. monetary stimulus is being removed at the same time,” said David Thompson, executive vice-president at Powerhouse, a commodities-focused brokerage in Washington.
Short Term Strategies, Scalping, Price Action Analysis, and Risk Management
WTI Crude Oil Price Forecast: Prepare for Next Weeks Breakout Now
The price of WTI Crude Oil (CFD: USOil), is pulling back off of weekly highs after yesterday’s trading saw Crude Oil reach a peak of $47.71. With today’s price action failing to breakout to new highs, technically this suggests that that Crude Oil prices might close the week with the creation of an inside bar. Knowing this, traders should continue to monitor the current weekly high will as a point of resistance for next week’s trading. Alternatively, Thursday’s low should also be considered a point of support for Crude Oil at a price of $45.74.
As Crude Oil prices consolidate between these values of support or resistance, traders may plan to trade either one of two scenarios. First, traders may elect to trade further consolidation next week if Crude Oil continues to trade in its $2.03 range. This strategy may be considered valid until price action breaks out either above $47.71 or below $45.74. The second opportunity traders may look for is a breakout from the identified trading range. In this scenario, traders may elect to extrapolate a 1X extension of the $2.03 range to find preliminary pricing targets. This places primary bullish breakout targets near $49.74, and bearish targets near $43.71.
The ratio of long to short positions for Crude Oil (CFD: USOil) stands at -1.19. This SSI (speculative sentiment index) reading shows that 54% of positioning is currently short WTI Crude Oil. Typically when SSI reads negative, this suggests that prices may continue to rise. In the event of a bullish breakout, traders should look for SSI to move towards new negative extremes. Alternatively if prices breakout lower, SSI may flip to a positive reading.
Oil futures settled on a mixed note Tuesday, with West Texas Intermediate crude ending at a one-week high and Brent crude finishing with a loss as traders eyed a pact between the world’s two largest crude producers, Russia and Saudi Arabia, aimed at stabilizing the market.
October West Texas Intermediate crude CLV6, +0.60% rose 39 cents, or 0.9%, to settle at $44.83 a barrel on the New York Mercantile Exchange, after trading as low as $43.84 during the session. WTI settled Friday with a gain of 3% at $44.44 and had climbed past $45 in electronic trading Monday, which was a holiday for U.S. financial markets.
November Brent crude LCOX6, +0.47% meanwhile, fell 37 cents, or 0.8%, to end at $47.26 a barrel after settling Monday up 1.7% at $47.63.
Russian and Saudi officials on Monday said they would set up a working group to monitor the oil market and come up with recommendations to promote stability. The announcement gave a lift to crude prices on Monday, though those gains faded by Monday afternoon as the news underwhelmed traders who had been hoping for a production freeze.
“Although, of course, Russia and Saudi Arabia (and all other producers) want higher crude prices, what they really want is higher prices at a given market share,” Troy Vincent, an oil analyst at ClipperData told MarketWatch. “It’s easy to agree that prices would ideally be higher, but not nearly as easy to agree on who will cede market share and by how much.”
Given that, “we are still in the same place we were during the last ‘freeze’ discussions [last Spring]: the biggest producers want higher prices but don’t want the return of U.S. shale production that would accompany these higher prices,” he said. “The quagmire continues for oil-revenue-dependent nations.”
There has been speculation over a potential pact to freeze production, with members of the Organization of the Petroleum Exporting Countries expected to hold an informal meeting on the sidelines of an energy forum in Algeria later this month.
“While the short-term gains from freeze deal speculations have been impressive, the commodity remains pressured with further losses expected if September’s informal OPEC meeting concludes without an effective deal,” said Lukman Otunuga, an FXTM analyst, in a note on Tuesday.
After meeting with OPEC Secretary-General Mohammed Barkendo, Iran’s Oil Minister Bijan Zangeneh said Tuesday that his country would support any OPEC decision that seeks to stabilize the oil market, state TV reported, according to the Associated Press. He said most members of the oil-producing group want to see the price of oil at $50 to $60 a barrel.
The comments apparently clashed with comments from a director at the National Iranian Oil Company. Iran’s PressTV reported Monday that Mohsen Ghamsari, the nation’s director for International affairs of the NOIC, said that NOIC may lift its output capacity to 4.3 million barrels a day in the first quarter of next year and eventually reach 5 million barrels a day in two to three years.
A proposal among major oil producers to freeze output last Spring failed after Iran refused to join in as it attempts to reach its pre-sanctions output level of 4 million barrels a day.
Back on Nymex Tuesday, October gasoline RBV6, +1.31% ended at $1.316 a gallon, up 1.5 cents, or 1.1%, while October heating oil HOV6, +0.82% fell less than half a cent to $1.409 a gallon.
October natural gas NGV16, +0.04% fell 7.5 cents, or 2.7%, to $2.717 per million British thermal units.
Weekly petroleum-supply data from the U.S. Energy Information Administration will be released on Thursday, a day late because of Monday’s holiday. The EIA is scheduled to release its monthly Short-Term Energy Outlook Report Wednesday.
August 29, 2016 Last Updated at 00:11 IST
Crude oil prices crashed during 2015 and made lows of $26 a barrel for the WTI crude and $29 a barrel for Brent crude, mainly due to the glut in supply. The Organization of the Petroleum Exporting Countries (Opec) meeting changed the oil markets, both dramatically and structurally. It began with Saudi Arabia relinquishing its supply management role and leaving the market to rebalance itself through prices. I have always believed the main reason for the sharp fall in prices was because it hovered between $90 and $110 for too long during 2012-2014, even as US crude oil production was moving up sharply.
Oil prices should have gradually declined during 2012-2014 but did not. So, during 2015, the fall was exceptional. During 2015, the global oil market was in surplus, which was as high as 1.8 million barrels per day (mbpd), though during 2013 this surplus was 0.52 mbpd. This surplus resulted in capitulation in crude oil prices at the end of 2015.
US crude oil production, which peaked in 2015, fell from 9.8 mbpd to 8.6 mbpd in 2016, the lowest output since May 2014 and likely to fall further. Investment in the energy sector was high during 2010-2014. It has, however, declined heavily in recent years with the sharp fall in prices.
The amount invested in global upstream oil capacity expansion during 2009 was around $300 billion. In 2014, it had reached $500 billion. The Opec earned $404 billion in net oil export revenue in 2015, which is a 46 per cent decline from the $753 billion it earned in 2014. Due to falling revenues, countries are not willing to increase investments in this sector. After the sharp fall in oil prices during 2015-2016, we have witnessed a sharp cut in investments, which will eventually balance the oil market as supply growth will remain muted. This is one of the most important reasons for us to remain bullish on crude oil. Billions of dollars have flown away from the oil market. On an average, oil markets have witnessed demand growth of one mbpd every year for the past five years and the gap between supply and demand is likely to decline from 1.85 mbpd in 2015 to one mbpd in 2016; during 2017, we expect it to drop further to below 0.75 mbpd.
After the sanctions over Iran’s nuclear programme were lifted, there was fear that the oil market would be flooded with Iranian oil, which might cause the glut to deepen. But, Iran’s production has moved up from three mbpd to only 3.85 mbpd. It is not able to ramp up production rapidly due to lack of foreign investment and its own unwillingness to undercut rivals on pricing.
Meanwhile, they have lost their share in oil exports. So, even if Iran’s production moves up another 0.2-0.3 mbpd, it won’t affect prices.
Going forward, we’ll have a balanced oil market and any decline in oil prices should be used as good buying opportunity. The outlook on crude oil is bullish from the longer term perspective. We expect crude oil to test $60 a barrel by the end of 2017. On the Multi Commodity Exchange, we may could it testing levels of Rs 3,800-3,900 a barrel by the end of next year.
Oil prices were modestly higher on Friday in a volatile session, as traders reacted to comments from Fed Chair Janet Yellen and reports of missile activity in Saudi Arabia.
The market was taking its cues from the movement in the dollar, which has been choppy following Yellen’s remarks.
At one point, crude benchmarks were up as much as 2 percent before drifting lower.
Brent futures for October were up 0.44 percent at $49.89 a barrel. U.S. crude was at $47.60 per barrel, up 27 cents, or 0.55 percent.
The U.S. crude oil rig count was at 406, Baker Hughes said on Friday. That compares to 675 a year ago.
The market was primed to react to Yellen’s speech in Jackson Hole, Wyoming, as her remarks initially caused a big rally in the dollar, which caused oil to slip. Later, the dollar pared those gains, with the dollar index at one point down as much as 0.5 percent. It was lately up 0.3 percent.
Oil prices touched the day’s highs after reports of Yemeni missiles hitting Saudi Arabia’s oil facilities, traders said. Saudi state TV reported that a projectile fired from Yemen hit a power relay facility in Najran, in the southern part of Saudi Arabia.
Sal Umek, senior analyst at the Energy Management Institute in New York, said he did not see much effect on the market from the Saudi Arabia reports.
“At the end of the day, what is driving the market right now is short covering, being that it’s Friday and the dollar taking a hit,” he said.
US oil rig count unchanged -Baker Hughes
Oil and natural gas traders have also been watching for the impact of Tropical Storm Gaston, saying it could possibly become a major hurricane in the Gulf of Mexico, taking out further supply.
A weaker dollar can be seen as supportive for oil prices as it makes dollar-traded oil cheaper for countries using other currencies, potentially spurring demand.
Oil prices were still on track for weekly losses of more than 1 percent as the Saudi energy minister watered down expectations that the world’s largest producers might agree next month to limit their output.
“We don’t believe any significant intervention in the market is necessary other than to allow the forces of supply and demand to do the work for us,” Saudi Arabian Energy Minister Khalid Al-Falih told Reuters late on Thursday.
Members of the Organization of the Petroleum Exporting Countries will meet on the sidelines of the International Energy Forum, which groups producers and consumers, in Algeria from Sept. 26-28.
— CNBC’s Berkeley Lovelace contributed to this report.
The spread between WTI and Brent can have a dramatic impact on shale-producer profitability.
— The Motley Fool
Aug 21, 2016 at 1:00PM
North Dakota Drilling Rig
Image source: Getty Images.
West Texas Intermediate, or WTI, is the most common oil-price benchmark for domestically produced crude. It is also the underlying commodity of oil futures contracts traded on the NYMEX exchange. Because of this, WTI is important to U.S. producers, which can pose a problem when it trades at a discount to other oil barrel prices such as the common global benchmark price Brent. In the past, the spread between the two has been quite wide, resulting in shale producers capturing less per barrel than their global counterparts:
WTI is a light sweet oil. “Light oil” means that it is a low-density liquid that flows freely at room temperature. It also has a low viscosity, low specific gravity, and high API gravity; WTI has an API gravity of around 39.6 and a specific gravity near 0.827, which makes it a lighter oil than Brent. Light oil typically trades at a higher price than heavy oil varieties because it produces larger quantities of higher-valued refined products per barrel. Meanwhile, “sweet” means it has a low sulfur content of less than 0.5%; WTI’s sulfur content is 0.24%, which is also less than Brent’s. Because sulfur is an impurity, refiners must remove it before refining the oil, which adds to the processing cost and therefore weighs on the price of sour oil.
The unique properties of WTI suggest that it should be a premium-priced oil. However, that is not the case.
Before the shale boom, most refiners in the U.S. were configuring their refineries to process heavy crude oil from Canada’s oil sands region because they expected increased imports from our neighbor to the north. Furthermore, most of America’s oil infrastructure was designed to handle foreign oil imports, not the flood of new domestic oil that came online during the shale boom. So domestically produced oil, which gets priced at WTI, started piling up in storage facilities, especially in the storage hub of Cushing, Oklahoma. This drove down the price of WTI, causing the spread between WTI and Brent to widen, as shown on the oil price chart above from 2011 to 2015.
One of the most pressing problems was that pipelines flowed from the Gulf Coast to the Midwest, which caused crude from North Dakota’s Bakken shale, in particular, to pile up in Oklahoma. Because of that, leading Bakken shale producer Continental Resources (NYSE:CLR), for example, only realized $89.24 per barrel during the fourth quarter of 2011. Contrast this with leading global producer Chevron (NYSE:CVX), which realized $101 per barrel in the same quarter. That $11.76-per-barrel price differential is substantial, especially for a smaller driller like Continental Resources.
With so much oil piling up in Cushing, pipeline companies Enterprise Products Partners (NYSE:EPD) and Enbridge (NYSE:ENB) embarked on a historic project to reverse the flow of a key oil pipeline from Cushing to the Gulf Coast. The initial phase of the Seaway Pipeline reversal was completed in early 2012, which helped alleviate some of the glut of oil stuck in Cushing. It also narrowed the Brent-to-WTI spread a bit. As a result, Continental Resources was able to realize $84.99 for its oil in the fourth quarter of 2012, compared to $91 per barrel for Chevron.
While Enterprise Products Partners and Enbridge subsequently brought on additional southbound capacity at Seaway and built other pipelines to move light oil, these debottlenecking activities did not eliminate Brent’s premium to WTI. That is because U.S. refining capacity still was not enough to process all light sweet crude extracted from shale. While refiners invested to increase their processing capacity and access to domestic crude, U.S. producers knew that WTI would continue to sell at a deep discount if it remained landlocked due to the longstanding ban on domestic crude oil exports. That is why Continental Resources, and fellow U.S. producers Pioneer Natural Resources (NYSE:PXD) and ConocoPhillips (NYSE:COP) led the charge to get the U.S. export ban lifted late last year. As a result, Brent now trades at a paltry premium to WTI, enabling U.S. producers to capture nearly as much per barrel as their global peers.
While the WTI-to-Brent spread is minimal at the moment, it is possible that it could widen in the future. That is something investors need to be mindful of when investing in shale producers like Continental Resources and Pioneer Natural Resources. If the Brent premium were to widen for some reason, these producers would not capture as much as global peers like ConocoPhillips and Chevron, putting them at a competitive disadvantage.
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