Like A Hurricane
Weekly EIA Report – 25-8-17 Like A Hurricane
See our OPEC Deal Tracker at the end of the newsletter for our ongoing analysis of the OPEC cuts.
I am not much of a Scorpions fan, but if you are an oil trader, it is very likely that Harvey will “Rock you like a Hurricane”. Tropical Storms, Hurricanes and Major Hurricanes are part and parcel of the oil trader’s life, even if things have been quiet for the last few years. If you are prepared, and religiously check the website of the National Hurricane Centre, you can usually see them coming and get prepared. We started tracking Harvey when it was a depression and then a Tropical Storm coming from the Atlantic into Caribbean waters. Having crossed the Yucatan peninsula, it rapidly reformed into a Tropical Storm and then a Hurricane. By the time it makes landfall in Southern Texas, it will have become a Major Hurricane, the first one to hit the Gulf of Mexico in more than ten years.
From an oil market point of view, Hurricane Harvey also bears some striking similarities with the infamous Hurricane Katrina which hit New Orleans in 2005. Causing a major price spike. Both storms crossed a landmass and weakened before rapidly regaining strength and heading back for the coast. Katrina hit the refining industry hard the week-end before heating oil and gasoline futures contracts expired. Harvey is about to do the same. US refiners may be much better prepared than they were in 2005, but it seems Harvey, once it has gone inland, will reverse course and move along the Gulf coast towards Louisiana. It could then go back out to sea and strengthen again. In other words, it is likely to impact Gulf Coast installations until at least Wednesday. It is unlikely to destroy any refinery, but will most probably lead to prolonged outages
Notice our main concern is refining, not crude. Next Thursday, the Gasoline and Heating oil futures contracts will expire, and physical players looking to deliver will be unable to call on affected refineries. Hence, they are likely to close whatever shorts they have and the September contract is likely to spike as a result. Crude is likely to remain firm in sympathy, but so far has failed to surprise anyone. This is probably because unlike 2005, most of US oil production is now inshore and stocks are more than ample.
The general advice is therefore to exercise extreme prudence. Ideally, take the week off and come back on the 4th of September. At the very least, do not short anything until you have clarity. If you like living dangerously, buy some refining margins and be prepared to turn tail if the storm fails to disrupt activity. Yet we believe this storm will be disruptive, and we have therefore not only closed our short margin positions, but reversed course. If we are lucky, September expiry will soar, allowing us to go short the October at highly advantageous levels and profit both ways. In any case, barring any surprises, Hurricane Harvey is likely to be a transient event, which should not affect the wider oil market.
In the rest of the world, the market sounds a bit like the Neil Young 70’s ballad: NOT “Like a Hurricane”. The supply side remains mired in a struggle between increasingly dire fundamentals and the assurances of OPEC and surrounding analysts that everything is just peachy and heading for rebalancing. Commentators are gleefully ignoring the fact that since OPEC first announced its plan last October, the US has added 1,078,000 barrels of production and exempt nations Iran, Libya and Nigeria have added another 721,000 barrels. Together this represents 1.799 million barrels, and while we this effectively neutralises the OPEC plan, we half-expect some bullish fanatics to point out that we are technically 1,000 barrels away from such a result. But, if we add falling compliance within OPEC and Non-OPEC, with some countries in the latter group having actually increased production, the OPEC cut is truly blown away by hurricane winds… But someone is still likely to tell you that if OPEC can raise compliance 124,000 barrels, everything will be fine.
Similarly, while we were promised strong demand in summer on the back of the gasoline season, we can only note that US Gasoline demand remains firmly 2% below 2016. Clearly there are few reasons to cheer, and we believe the end of the driving season and the beginning of refinery maintenance will scupper any bullish plans for good.
In 2017, refining has been running more than a million barrels over the five-year average and exports are also over the million-barrel mark and climbing. This should lead to stock decreases well over 10 million barrels. Instead, this week we only saw a drop of 3.327 million barrels and the market dutifully remained unimpressed. Brent spreads are slowly starting to weaken once again, and we are happy to have sold Jan- Feb. Look to crude resuming its downside once the hurricane has passed.
US Commercial Crude Stocks (Source: EIA)
(High/Low/Average Range over five years in thousand-barrel increments)
Distillate stocks remained stable having only moved 28,000 barrels, and as they dipped, we reversed our position near US$ 19 before the hurricane started to look threatening. That margin briefly rallied close to US$ 22, but we only manged to close the position below US$ 21. Harvey could make the margin higher still, but right now, I have taken some money and vanishing for the week-end.
Distillate Stocks (Source: EIA)
(High/Low/Average Range over five years in thousand-barrel increments)
Gasoline stocks have dipped a disappointing 1.223 million barrels and were it not for Harvey, the season would probably be over. The October margin is rising due to the hurricane, and it might be a sale next week.
Gasoline Stocks (Source EIA)
(High/Low/Average Range over five years in thousand-barrel increments)
US refining continues to be at the highs, but is likely to dip noticeably as installations in the path of the storm shut down. It will be interesting to see how much damage, if any, Harvey generates.
US Refining (Source: EIA)
(High/Low/Average Range over five years in thousand-barrel increments)
THE OPEC DEAL TRACKER
(Please note that other than our future predictions for exempt nations and shale, we only use official numbers from OPEC and the EIA. Only official numbers can modify our estimates.)
With its August report, OPEC has again increased demand growth for the fourth quarter, but has left Q3 untouched. We think this is over-optimistic, and it doesn’t change the overall situation. Production in July reached 32.87 million barrels with exempt nations adding 721,000 barrels and compliance falling to 88.76%. Since October 2016, US output has risen 1,078,000 barrels, something which OPEC and most commentators had not expected at all. Taken together, these three factors now add up to more than 1.9 million barrels, neutralising and even overtaking the OPEC cut. We do not believe OPEC can correct the situation this year, and expect production to remain at or above 32.8 million barrels. Hence, the situation will be as follows:
(Source: OPEC/EIA)
THIS WEEK:
- US production has now grown 758,000 barrels in 2017 and this will accelerate as heavy Alaskan field maintenance continues to subside.
- Exempt nations Libya, Iran and Iraq are 721,000 barrels over their October 2016 levels
- At current rates, we now expect an average daily surplus of 240,000 barrels in 2017
- As we had predicted, there was no deficit in Q1 or Q2
- US Oil Production continues to be over 9.5 million barrels a day and will likely be near 10 million barrels a day by the end of the year
Magma’s Assumptions:
- Iran, Libya and Nigeria will together add 100,000 barrels a day each remaining quarter
- Shale will add 150,000 barrels a day each remaining quarter
OPEC’s Ideal outcome:
In accordance with OPEC’s June report, even with compliance near 100%, production is at 32.87 million barrels. Even if we assume OPEC manages to get this number back to 32.5 million barrels, the “perfect outcome” with no further interference from shale or exempt nations looks like this:
(Source: OPEC)
Having increased demand, the best OPEC can hope for is a 30,000 barrel a day deficit, which is very far from anything you could call success.