Crude Oil Glut Widens, Saudi Arabia ‘Jawbones’ Prices
When I dig deep into the world of barreled and stored Crude Oil, Bearish signals abound in the EU market that helps dictate global Crude Oil prices.
The price difference between Brent Crude for delivery out 2 and 3 months, a meausre telling traders how well supplied the market is, widened to minus 0.69 bbl Thursday, the biggest discount since February. Then, the headline price for the grade was about 35/ bbl.
The weakness in the time-spreads for Brent Crude contrasts with a rally in headline prices above 50/bbl as speculators bought in after OPEC surprised traders by announcing the outline of a production cut in Algiers last month.
Any deal contemplated far from completed, In the short-term the market is oversupplied not by a small margin, but by a large one.
Crude Oil traders say the European and Mediterranean market is awash with Crude Oil as Nigeria and Libya ramp up production following sabotage, Russia increases output, and Kazakhstan’s massive Kashagan Oilfield in the Caspian Sea starts pumping. North Sea production is also returning from Summer maintenance. At the same time, refineries that process the Oil are themselves undergoing seasonal work, eroding their demand.
Also, more WTI light-sweet crude is flowing into the Atlantic Basin and competing with Brent.
A further complication is that freight costs have risen from Summer lows, hampering long-haul shipping and preventing traders from selling the European surplus into Asian markets or putting it into floating storage.
The gloomy export outlook for Brent-related Crude’s to Asia is made all the more gloomy by the growth in production in the already well-supplied Atlantic Basin.
The weakness in physical markets comes at time when money managers have been betting more than ever that prices will increase.
Speculative net Bullish, or Long, positions in Brent Crude and WTI Crude Oil combined rose to their highest marks in data going back to Y 2011 last week.
The glut of Crude Oil in the physical market may spur some investors to exit those longs before Brent Crude futures for December expire at the end of this month. If traders want to maintain those positions, they will have to accept some losses to buy January contracts that are trading at a higher level, a condition dubbed “Contango.”
Speculators “now have to decide to either take profit” or “roll into a widening Contango to maintain length into the next OPEC meeting” on 30 November.
The Key challenge for speculators is perhaps Nigeria, where production is returning after months of disruptions. The West African OPEC country is expected to pump this month about 1.7-1.8-M BPD, up from a 30 year low of 1.39-M BPD in August.
Nigeria cut the price of every type of crude it sells last Tuesday in an effort to regain a share of the global energy market at a time when its state-owned oil company said there’s a “huge” glut of cargoes.
Libya, another OPEC member, is also producing more. The country’s National Oil Corp. said last week it was pumping 560-K BPD, which would be the highest level since November 2014
In Kazakhstan the 1st barrels from the $50-B Kashagan field have started to flow while Russian production is running so far this month at 11.2-M BPD, up about 100-K BPS from last month and roughly 500-K BPD higher than in August. The Russian increase in 2 months is equal to the total output of OPEC member Ecuador.
The flood of Crude Oil into Europe is at odds with comments from Khalid Al-Falih, Saudi Arabia’s Minister of Energy and Industry. The Oil market is “clearly rebalancing,” bringing the industry to the end of a “considerable downturn,” he said at a conference in London on 19 October. who is he talking to and about what?
Oil traders are unsure what will give.
If time-spreads narrow that would support a rise in headline prices, should the Contango keep widening, that could help bring down Brent Crude. OPEC, meets on 30 November in Vienna may decide.
The world is awash in Crude Oil, and my work still shows a test of the Y 1998 lows adjusted for inflation at say 23-28/bbl
|HeffX-LTN Analysis for OIL:||Overall||Short||Intermediate||Long|
|Bullish (0.41)||Bullish (0.42)||Bullish (0.42)||Bullish (0.39)|
|HeffX-LTN Analysis for USO:||Overall||Short||Intermediate||Long|
|Bullish (0.31)||Bullish (0.33)||Bullish (0.25)||Bullish (0.35)|
Have a terrific weekend.