Brief Timeline of Saudi Drone Attack Events

What we know so far

2 key Saudi oil installations were part of a 10 drone attack on Saturday. They were Abqaiq, that region processes 7M bpd of crude and Khurais, the second-largest oil field in Saudi Arabia with capacity to pump around 1.5 million b/d of mainly Arab Light crude.

Yemen’s Houthi rebels claimed responsibility.

Saudi Oil Ministry confirmed that 5.7M bpd of oil capacity was affected in attack (just over half of current production numbers) and 2B cubic feet of gas used to produce 700K barrels of nat gas liquids also affected. https://www.spa.gov.sa/viewfullstory.php?lang=en&newsid=1969119#1969119

US Military claimed that the attacks came from the Northwest and ruled out Yemeni involvement instead saying the attacks had to come from Iranian installations in Iraq or from Iran. https://www.reuters.com/article/us-saudi-aramco-fire-pompeo/u-s-blames-iran-for-saudi-attacks-pretend-diplomacy-idUSKBN1VZ0ML

Iran vehemently denied this and warned the US that military assets were within range of their missiles https://www.theguardian.com/world/2019/sep/15/iran-denies-drone-attacks-on-saudi-arabia-aramco-ab-qaiq-oil-facility

Now we are waiting for an assessment update from Saudi Arabia on recovery, inventories, spare capacity etc. (a million articles on varying time frames are floating around…no official word from the Ministry however)

Trump tweets on 15 Sept. Sunday night

U.S. Secretary of State Mike Pompeo told Iraqi Prime Minister Adel Abdul Mahdi that the United States has information confirming Baghdad’s denial that Iraqi territory was used to launch an attack on Saudi oil facilities, Iraq said on Monday https://www.reuters.com/article/us-saudi-aramco-attacks-iraq-usa-idUSKBN1W119L

Industry sources told Energy Intelligence that 40% of the lost production had already been restored by Monday, while one source said national oil company Saudi Aramco expects most of the rest — more than 3 million b/d — to be brought back on line by the end of September http://www.energyintel.com/pages/eig_article.aspx?DocID=1048097&utm_campaign=top-story&utm_medium=site&utm_source=1&utm_content=Saudis+Scramble+to+Restore+Lost+Output-1048097&ts=1 

UPDATE: Saudi Arabia’s Crown Prince Mohammed bin Salman bin Abdulaziz received a phone call on Monday from US Secretary of Defense Mark Esper.

For his part, the Crown Prince stressed that the Iranian threats are not only directed against the Kingdom but also affects the Middle East and the world. https://english.alarabiya.net/en/News/gulf/2019/09/16/Saudi-Crown-Prince-Iranian-threats-directed-at-the-world-not-just-Kingdom.html

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IMO 2020

IMO 2020 has not really triggered a lot of price action yet.

On Jan 1 2020 the current standard of 3.5% sulphur fuel (HSFO will be lowered to a max. of 0.5% (LSFO). Global consumption of fuel oil for large ships is currently 3M bbd, and although this is roughly only 3% of global consumption a change in these oil products could lead to significant price swings.

Three options to comply

  1. Installing a new motor or revising and existing one suitable to handle LSFO
  2. Installing a motor that runs on LNG
  3. Installing a scrubber

LNG is a clean alternative, this requires a large investment, so in the near term either a revision of an exiting motor or a scrubber is most cost effective. That said with a scrubber you run the risk of tighter fuel standards before your investment has paid for itself.

Oddly, although the measure was announced in 2016, the market remains reluctant to act, even though more ships are entering the docks for maintenance to have the technical adjustments made to their motors, transport rates and fuel prices have remained relatively stable.

Risks here

HSFO

As demand for HSFO decreases, there is a risk of overproduction at the same time there could be a shortage in some regions if refineries switch over to LSFO too fast.

LSFO

There is a risk of shortages if too little produced or too much is already purchased by large ship owners for security supply reasons.

So far price movements have not reflected the possible changes lying ahead

So questions are whether

  1. the market is underestimates this transition?
  2. Have many parties hedged themselves for the changes?

And/or

  1. Can we expect strong movements in the last months of the year?

So far we have seen some changes, for example more contracts for the trade in LSFO are becoming available and a few hedges have been seen and Refineries are preparing for the shift in demand.

The question here remains whether the lack of IMO2020 implementation is the calm before the storm or whether these stricter fuel regulations turn out to be a fizzle. This is definitely something to keep an eye on over next couple months here.

WTI/Brent Futures Curves-what are they telling us

We have just seen a rather large sell off in both the WTI and Brent markets. Right now the overall global growth slowdown theme is taking precedence above all.

For more details on this you can listen to Macrovoices Energy Week Podcast 15 May where we discuss the bull/bear scenarios in great detail.


First lets define the curves.

Backwardation happens when a commodity is scarce and/or perceived to be, and the immediate need to own it outweighs the cost of carry. For crude oil, this is a worry about supply, whether its geopolitical, weather, production etc. For long specs in the market this is a favorable condition as they expect the market to rise over time. Contango is the opposite of this.

2019-06-01_13h31_14

Now, lets set aside price for a moment and just look what the very FRONT END of the curves are telling us. (the back end will be a discussion for another day as it can be subject to financial manipulation and discord with the physical market)

I will start with 1 Feb. when the US first enacted sanctions on PVDSA. (for the purpose of this exercise I have deliberately left off the Y (price) axis)

2019-06-01_14h15_19

Now look what happened over time as pressure on the Brent market increased due to Venezuela and Iranian oil sanctions, geopolitical issues (Libya), Russian oil contamination and most recently Mexico tariffs.

2019-06-01_14h16_11

Clearly this market is jittery about supply issues.

Just look at the difference from 30 May to 31 May (see above) after Mexican tariffs were announced. The front end, got notably spooked steeper.

2019-06-01_14h34_31

Now let’s take a look at the WTI market. This market is telling us an entirely different story.

2019-06-01_14h32_04

2019-06-01_14h30_05

The front end of this market has stayed in contango, albeit has shifted, as concerns of over suppy due to rising US production, pipeline constraints out of the Permian, and refiners need for more medium heavier based crude grades are (just some of the things) plaguing this market right now.

We can take the Mexico tariff announcement again and compare. This market went clearly steeper into contango from 30 May to 31 May (above)

2019-06-01_14h40_30

In sum, the curves are telling us that the market is still anxious about Brent supply, even after a massive sell off, whereas, concerns of over supply are still pulling on the WTI market.

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What is happening in the crude oil market (part 1 WTI)

 

Was hoping to do this in 1 part, but it is going to be a 2 part post

 

First I think we need to establish the fact that there are 2 sets of fundamentals going on…one for WTI and one for Brent.

Most tend to lump these in one category: OIL

But they are most certainly independent of one another.

First, let us take a look at the WTI market

Trump has been on a twitter rampage to try and provoke/coerce OPEC to pump more oil…the problem, however lies more domestically than internationally

There are several reasons for the recent price spike in the WTI contract (backed off since then, but we have to start somewhere)

  1. Iran Sanctions
  2.  US Steel Tariffs
  3. Syncrude supply disruption
  4. Permian bottleneck
  5. Months of falling imports of sour crude from KSA for Motiva
  6. VZ disaster
  7. TransMountain pipeline

 

#1 I think is self explanatory

#2. 97% of US well pipe is imported because US Steel mills are not tooled for this kind of pipe…Trump administration continues to deny oil companies waivers, even on pre-existing purchases, adding billions to already inflated budgets

#2 before the Syncrude news came out we saw an explosive upside in near month spreads

2018-07-15_16h38_58

this is why I always say: watch the spreads…they are telling you something

  1. Permian bottleneck is causing a huge differential in Midland v WTI spread, therefore buoying the WTI price
  2. KSA, instead of importing sour crude to mix with light crude for their Motiva refinery (largest in the US) they took to drawing on Cushing sour stocks (what they could do, without even increasing production, is increase imports to the US and alleviate the draw on US domestic supplies) (Trump may want to give me a call)

Here is where we hit the heart of the problem and why the spreads started blowing out front month wise ..Cushing..it is all about Cushing ,the actual $CL_F #WTI contract that you are all trading . (OPEC can’t fix this with more production)

  1. VZ self explanatory
  2. TransMountain self explanatory.

 

So, what options does the US have at this point? Blaming OPEC is ridiculous…

  1. Soften up on Iran Sanctions (this has been alluded to in the media already by the administration)
  2. Allocate waivers for pre-existing purchases of well pipe
  3. Syncrude supply disruption: in actuality, this frees up some of the congested pipeline capacity  from CA to US, to ship WCS  (funfact: Citgo refineries have been experimenting with using WCS instead of VZ oil for over a year now…they are more prepared than you think)
  4. Permian is trying to add pipeline capacity as fast as they can, but will take some time (2019). Rail is expensive and there is a truck driver shortage…larger companies that have access to better transportation (contracts) will fare better than smaller companies at this point.
  5. VZ unfortunately is a lost cause, import WCS as a replacement
  6. Syncrude disruption should have alleviated some of the bottleneck allowing for more WCS …but this pipeline must be built

Stay tuned Brent update

 

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Understanding the OIL, EUR/USD Correlation

 

Most oil exporting countries trade assets in USD, meaning, these countries receive a significant portion of USD inflows from the proceeds of these sales. Thus the foreign currency reserve balances of these oil exporting countries, in a sense, is broadly reflected by the price of oil. We can see this as reflected in the chart below. Up to 2014, reserves increased notably, and then declined considerably as the price of oil fell.

Screenshot_4

However, data also shows that they invest part of their reserves in EUR, as they sell a large share of their production to the Eurozone.

Screenshot_5

Thus, when the price of oil falls, this means that a smaller portion of USD is transferred to EUR, thus contributing to a depreciation of the currency. Inversely, when the price of oil increases, a larger portion is transferred to EUR, contributing to the appreciation of the currency. For this reason, many funds lock their positions in EUR/USD with those in crude oil.

Screenshot_6

Therefore, it is no coincidence that COT data shows crude oil and EUR in lock step.

Hope this helps!

Tracy @chigrl

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Oil bull run wavers as investors wait to see what 2018 holds

Bloomberg/New York

Sunday، 24 December 2017 09:25 PM

Oil’s bull run is grinding to a halt.
Hedge funds lowered their bets on Brent crude after they rose to a record a week earlier. And the net-bullish position on West Texas Intermediate, which hit a nine-month high last month, dwindled for a third straight week. The message: After a months-long build-up, investors are wavering, concerned US crude will continue to boom in 2018, undercutting Opec’s push to drain a global glut.
“It seems like now most people have got their positions and are waiting to see what 2018 brings,” said Rob Thummel, managing director at Tortoise Capital Advisors.
Oil futures in New York have jumped almost 40% since June as Opec and its allies extended their production-cut deal and US inventories shrank to two-year lows. But the decline in American stockpiles is largely due to refinery maintenance and exports near an all-time high. Meanwhile gushers in the country are producing at a record pace.
Global stockpiles won’t fall enough to reach the level targeted by Opec when the group meets in June, Saudi Arabia’s Energy Minister Khalid al-Falih said last week. American output is poised to reach 9.99mn bpd in May, according to the Energy Information Administration. That would surpass Saudi Arabia’s curtailed production of 9.97mn bpd in November.
The Brent net-long position – the difference between bets on a price increase and wagers on a drop – fell 1.1% to 538,045 contracts in the week ended December 19, according to data from ICE Futures Europe. That’s after reaching a record 544,051 contracts in the previous week. Longs fell 1.2%, while shorts decreased 1.8%.
Money managers cut their WTI net-long position by 1.8% to 383,828 futures and options during the week, according to data from the US Commodity Futures Trading Commission on Friday. Longs fell by 1.2%, while shorts rose 3.9%.
“It’s been a good year,” but there’s “some worry about what next month is going to bring,” said John Kilduff, founding partner at Again Capital in New York. “There’s not as much enthusiasm about the Opec/non-Opec accord as there was even a few weeks ago.”
The North Sea’s Forties Pipeline System, which carries crude used to price the Dated Brent benchmark, is set to return to normal flows early in the new year, according to a statement from operator Ineos Group. The outage, which gave a boost to prices, was the first time a force majeure had been declared in the North Sea since 1988. Repairs are expected to be completed by “around Christmas.”
In the fuel market, money managers reduced their net-long position on benchmark US gasoline by 2.1%. Meanwhile, the net-bullish position on diesel rose by 1.9%.
Heading into next year, investors will be watching how long it takes to get inventories back to the five-year average, Thummel said. The Opec deal extension brought some certainty to the market, which is now waiting to see how the cuts and US production play out.
“That was the big cloud overhanging the oil market and prices,” he said.

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2 Scenarios

Either we reject here and head toward 49….or we continue higher to get the repair above then down…watching 51.50 area carefully

 

Screenshot_1