THE ONYX VIEW | JUNE 2018

Published 04 JUNE 2018

 

CRUDE


Our key consideration going into June is how the crude market responds to the light overhang in the market. The evidence still suggests that sweet barrels are struggling to clear locally in Europe and the pressure from US barrels being brought over is putting further pressure on light sweets. We do not believe this is likely to be alleviated going into June and therefore are of the opinion we will remain weak across the Dated Brent derivatives and prompt Brent time spreads. Similarly in the US, the light sweet complex remains dire relative to the benchmark despite strong profitability for refiners running the spec. As we concluded last month, this suggests there is too much light sweet crude and therefore expect continued pressure on the WTI-Brent arb derivative and WTI time spreads.

The sour complex, on the other hand, continues to be supported, evidenced from strong Urals buying and a consistent pull of heavy crude from Angola in West Africa to Asia. With the Dubai benchmark continuing to price out strongly, the market locally in Asia is dragging the overall sour complex up globally. We believe the key result will be the Brent/Dubai contract under sustained pressure as a proxy for light vs. heavy crude, whilst Dubai time spreads should remain at elevated levels. However, the risk to this will be an influx of crude from OPEC and Russia who supply heavy crude and will be itching to profit from the prompt strength in their grades.

Although the WTI-Brent arb has widened considerably over the course of the month, it is still insufficient in alleviating the glut in Cushing and the downward pressure on the WTI Midland differential contract. With logistical constraints on the pipeline, we expect the prompt time spreads to continue to roll up weak and arb fixtures to continue to increase into Europe and Asia. The East’s appetite for crude from Europe and the US could begin to wane. As the East begins to bring more sour crude into the market, US crudes may be diverted from the East to Europe which will put further pressure on Cushing and European sweet physical differentials.

 

 
 
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We are going into Q3 peak demand season, with the market most likely positioned for this in products such as gasoil and gasoline spurring it on.

 

 

products

As we said last month, we expect the light crude complex to remain under pressure going into June: the profitable margins are not sufficiently attracting refiners to these light crudes which are becoming ever more abundant due to US production. 

However, refineries are coming back online in June, and so we expect the appetite to be for light crudes relative to heavy and therefore, the light feedstocks to come under pressure. Consequently, for oil products we remain particularly bearish on the light end feedstocks, particularly naphtha.  

It must be noted that we are going into Q3 peak demand season, and the market is most likely positioned for this in products such as gasoil and gasoline and spurring it on. 

Although, with flat price “high”, those products that are often in high demand in the summer (such as jet fuel and gasoline), are going to be more vulnerable to retail demand fluctuations. Gas prices in the US for example are likely to largely influence the demand for gasoline if end users deem the prices too high. Similarly, Ryanair suggested small airlines may struggle to remain profitable especially in Q4 when the demand for travel lowers. Q4 tends to see the market realign, and if this adjustment is downward as we expect, products will also correct downwards.

 

MACRO market

The global financial market has been subject to weakness over the course of the month, falling on geopolitical headlines and concerns of the Eurozone’s stability. Bonds have weakened generally as political stability concerns weigh in over Italy’s political crisis.

Over the month we saw the equity markets reacting to Trump’s narrative: Cancellation of talks with North Korea by Trump led to sell-off in US equities, and the US President also stated that oil prices were “artificially” too high as a result of OPEC’s supply cuts, as they filter into the US economy in the form of high inflation

The US dollar has set new highs for the year in May: the recent uptick in oil prices could have been an accelerator as it is a dollar denominated commodity.

The main geopolitical chatter concerning the US going into June are the trade deals as Trump considers new tariffs. Additionally, oil prices have been a considerable influence on the global financial market, so the expectations over OPECs impending decision towards the end of June will likely feed into the equity markets

 
 

OUR CONCLUSION
JUNE 2018

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With the expectation of a continued weak light-sweet physical market, our opinion is that the benchmark crudes WTI and Brent will be under pressure as the physical and futures align.

 

FLAT PRICE EXPRESSIONS

Sell WTI Flat Price

  • We expect August WTI Future to settle between $61-63 towards the end of June.
  • We would suggest that if August WTI breaks through $70, we reconsider the trade.

 

STRUCTURAL EXPRESSIONS

Sell Q/Z WTI
SELL U/Z BRENT

  • We expect WTI spreads to move down 0.15/spread.
  • We expect Brent spreads to move down 0.15/spread.
  • We would suggest if spreads move up more than 10c/spread, we reconsider the trade.

 

PRODUCTS

SHORT UZ NAPTHA
LONG QUV BRENT FLY
LONG GASOLINE SPREADS

We expect the whole barrel to be under pressure, but the weakness in Naphtha to be more exaggerated. With refineries coming back online it is expected they will prefer light crudes over heavy sour due to their competitive prices.

  • We expect Sept-Dec Naphtha to move down $1.50/spread

  • We would suggest if spreads move up more than $1/spread, we reconsider the trade

 

EVENTS

We expect OPEC will test the reaction of alleviating the supply cuts over the course of the month, most likely through vague public announcements. Given over-compliance with the cuts, we expect this to ease from the 150% it was in May, which we expect will be led by an increase in production of Saudi’s Arab light crude grade. We are also of the belief that Russian producers will be pressuring the government to allow for increasing exports as a combination of a recent retracement in Urals diffs from -$4/bbl to -$1.30/bbl in N.W.E., a high outright price and a general reluctance for long term adherence to the cuts will be too much for the Russian oligarchs to resist. 

We are approaching the time whereby there is increasing chance of annual Forties maintenance to be announced. Given Forties cargos are instrumental in setting the assessment price of benchmark Dated Brent, any significant reduction in supply will provide upward pressure on Brent complex and therefore Brent Futures. In the case of the announcement we would expect a bullish reaction in the associated derivatives that will almost certainly provide short term support to global crude. 

Also on outages, the Product market has generally been underperforming relative to expectations going into summer season, however with it being peak driving season in the US, any disruption to Gasoline will leave the light-end and associated blending product derivatives vulnerable to a sharp upward move.


 

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