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
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
- Installing a new motor or revising and existing one suitable to handle LSFO
- Installing a motor that runs on LNG
- 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.
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.
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
- the market is underestimates this transition?
- Have many parties hedged themselves for the changes?
- 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.
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.
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)
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.
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.
Now let’s take a look at the WTI market. This market is telling us an entirely different story.
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)
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.
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)
- Iran Sanctions
- US Steel Tariffs
- Syncrude supply disruption
- Permian bottleneck
- Months of falling imports of sour crude from KSA for Motiva
- VZ disaster
- 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
this is why I always say: watch the spreads…they are telling you something
- Permian bottleneck is causing a huge differential in Midland v WTI spread, therefore buoying the WTI price
- 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)
- VZ self explanatory
- TransMountain self explanatory.
So, what options does the US have at this point? Blaming OPEC is ridiculous…
- Soften up on Iran Sanctions (this has been alluded to in the media already by the administration)
- Allocate waivers for pre-existing purchases of well pipe
- 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)
- 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.
- VZ unfortunately is a lost cause, import WCS as a replacement
- Syncrude disruption should have alleviated some of the bottleneck allowing for more WCS …but this pipeline must be built
Stay tuned Brent update
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.
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.
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.
Therefore, it is no coincidence that COT data shows crude oil and EUR in lock step.
Hope this helps!
Either we reject here and head toward 49….or we continue higher to get the repair above then down…watching 51.50 area carefully
I both swing and day trade …levels of interest are for my personal intraday purposes and/or lvl to lvl trading….. NONE IS TRADING ADVICE….just my personal meanderings