OPEC hope trumps EIA builds

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Oil is rallying for a second consecutive day, despite a bearish-tilted EIA report. As more weight is placed on behind-the-scenes OPEC meetings, financial positioning is shifting bullish once more. Hark, here are six things to consider in oil markets today. 



1) While it seems beyond the realm of possibility that the President-elect will follow through on his threats to ban Saudi crude imports to the U.S. (the kingdom is, after all, the second-largest supplier of crude to the U.S. after Canada), there is also anxiety mounting in other OPEC countries who supply black gold, Texas tea to the U.S.

Donald Trump’s threat to ‘become independent of any need to import energy from the OPEC cartel‘ has Nigeria concerned about its trade relations; the U.S. is the largest foreign investor in Nigeria.   

As the lifting of the U.S. export ban has brought WTI back in line with other global benchmarks such as Brent, and as U.S. production has dropped off – and particularly the transit of crude-by-rail to the East coast – Nigerian oil deliveries to the U.S. have climbed to over 200,000 bpd this year.

Imports have more than tripled from 2015 levels, despite violence and sabotage disrupting domestic production in the West African nation this year. Indeed, imports in recent months would likely have been higher if it had not been for this – and could be lower going forward. The vast majority of Nigerian crude is discharged on the East coast:

Nigeria oil imports to the US ClipperData.jpg


gasoline exports ClipperData.jpg2) This Bloomberg article includes our insights into the U.S. gasoline market, and how exports have ramped up in recent weeks. The increase has been in response to the Colonial pipeline outage, meaning gasoline has been stranded on the Gulf coast.

As Gulf coast inventories have hockey-sticked higher (hark, below), some of this excess has been siphoned off, with exports climbing above 1mn bpd in the weeks following the outage. Although not quite yet through the current week, our ClipperData illustrate (at right) another strong week of exports is on the cards. 

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3) A triumvirate of builds from today’s EIA inventory report is tilted bearish for the crude complex; a firm 5.3 million barrel build to crude stocks was due to a strong rebound in imports. Refinery runs also showed a healthy increase, meaning builds to both gasoline and distillates. The overall theme of this report is that of healthy supply: in terms of oil imports, refinery runs, and inventories.

Above we discussed how gasoline exports have been extremely strong from the U.S. Gulf. This is underscored by a draw to gasoline inventories for PADD3 in this week’s report. Even though refinery runs increased by 297,000 bpd, or 3.4 percent, gasoline inventories still fell by 0.4 million barrels. Nonetheless, gasoline inventories at 82.2mn bbls are still over 7mn bbls higher – or 9.5 percent higher – than last year’s level.  

padd3 gasoline stocks Nov 2016.jpg

4) The IEA today has released its World Energy Outlook, which takes a look at broader, longer-term trends for global energy supply and demand. Its main scenario projects a 30 percent rise in global energy demand by 2040.

Focusing on the oil market, the IEA expects oil consumption to still be at 103mn bpd by 2040 . Similar to OPEC’s World Oil Outlook last week, the agency sees OECD oil demand dropping significantly (down 12mn bpd by 2040), but is more than offset by non-OECD demand growth, led by India.

One big change highlighted in the report relates to fossil fuel subsidies. They dropped last year substantially to $325 billion, from $500 billion in the year prior. This was driven by key petro-states unwinding fuel subsidies amid lower oil prices. 

Even with the pledges in the Paris climate accord, 74 percent of total global energy will come from fossil fuels in 2040, down 8 percent from 81 percent in 2014: 

global energy mix.jpg

5) As the chart below illustrates, there were a record number of WTI call options purchased yesterday on the CME, as hedge funds and other speculators position themselves ahead of a potential OPEC production cut at the end of the month.

The volume reached the equivalent of 303mn bbls, surpassing the previous record in 2011 of 221mn bbls.   

call volumes.jpg

6) Finally, the U.S. Geological Survey released a report yesterday which said part of the Permian Basin, the Wolfcamp formation, could hold as much as 20 billion barrels of crude – three times the size of the Bakken. Companies such as Concho Resources Inc. say two recently drilled wells are producing an average of 2,000 bpd. The report also estimates that Wolfcamp holds 15 Tcf of natural gas, and 1.6 billion barrels of natural gas liquids.