Scraping the barrel – Guest Analysis

AxiTrader

Asia Oil: Oil prices could stabilize at a higher range if the current OPEC+ compliance commitment argument for price recovery holds water.

By Stephen Innes, Chief Global Market Strategist, AxiTrader

The anarchy in the streets of major metropolitan areas across the US in the wake George Floyd’s death threatens to throw a wet blanket on the price recovery over the short term as investor optimism over economic reopenings in the US could wane. If American consumers were reluctant to come out of their Covid-19 lockdown cocoon fearing a secondary spreader, with police cars ablaze, freeways blocked and videos of mass looting shared through social media like wildfire, they’re not going to feel any safer. 

Crude oil price rose to end the week on a positive tone despite confirmation of the crude build in the EIA data that the API flagged up in the session before. Nonetheless, US-China tensions weighed through the early part of Friday. At the same time, the crude build didn’t help, albeit its primary source was a significant rise in Saudi imports that one could validly claim was already in the price after trackers had flagged the oil Armada heading for the US weeks ago.

Reports ahead of the June OPEC meeting suggest that Saudi Arabia is considering proposing extending the 2Q cuts further into 2020, but traders remain wary of a Russian pledge.

A phone call last week between Saudi Crown Prince Mohamed bin Salman and Russian President Putin should put some of those pre-OPEC meeting jitters on the back burner; sources suggested the call resulted in a reiteration of a commitment to continue cooperation on supply cuts, reducing the risk of a split at the OPEC+ meeting on June 9.

Still, doubts remain that Russia might not go along with an OPEC decision to extend the duration of the initial two-month period of deepest production cuts within the OPEC+ agreement and that they’d begin phasing out cuts from July. While the fundamental impact of that would be limited, any sign of conflict between the two countries contributing the most to the OPEC+ agreement would provide poor optics and bring back memories of the March oil price war that started this oil market fiasco. 

On Friday, Baker Hughes reported that the number of active US rigs declined by 15 to 222 this week. The oil rig count has now fallen for 11 weeks in a row, hinting of more CAPEX divestment in US oil production and a sharper downward adjustment in drilling activity than in 2015. All of which is indicating greater discipline and may moderate future supply growth, which is very bullish for oil.

The market will take note of the impressive recovery in Chinese refinery production, in addition to the tasty eye candy from both Google and Apple mobility tracking data. With the US only a third of the way up from the trough in US product demand, there’s no reason the US refineries can’t gradually fill that gap as more and more US states relax lockdown measures and more consumers hit the roads.

While only a vaccine will signal all systems go, there’s still plenty of room for refining run rates to rise when mapping to the comparable uptick on run rates to Chinese refinery demand. 

With indications of strengthening and continued OPEC+ commitment amid signs that OPEC+ resolve will last at least through the end of the year, oil prices should continue to rise if the current OPEC+ compliance commitment argument for price recovery holds water.

But given the substantial rise in US oil inventories last week, it suggests we’re not out of the woods just yet.

Crude inventories are building outside of Cushing and product stocks are still rising. US crude stocks have now been broadly flat for the past four weeks – the glut has even shifted from Cushing, where NYMEX WTI futures settle, to other regions. Cushing stocks were down again last week and are down 12mb since the start of May, while Gulf Coast crude stocks have risen 12.5mb over the same period.  

Meanwhile, stocks of oil products continue to build. The build-in distillates have been particularly quick and worrisome. Unless it reverses this week, it may act as a headwind to further near-term improvement in crude prices as the recovery in product demand hit the brakes last week, highlighting how the nascent demand recovery will be anything but smooth sailing 

Fortunately we’re in the typical period of seasonally rising refining runs. Sadly, the past historical correlation could prove meaningless in a Covid-19 environment as past consumer consumption behavior is not necessarily transferable. 

Find out more about AxiTrader here 

Read this next

Digital Assets

Crypto exchange Bittrex exits US market amid regulatory woes

Bittrex said on Friday it plans to wind down operations in the United States and voluntarily liquidate because of the uncertain regulatory environment surrounding their business.

Institutional FX

Tradeweb completes integration of Nasdaq’s US fixed income platform

Tradeweb Markets has completed the technology integration of Nasdaq’s US fixed income electronic trading platform, formerly known as eSpeed, which it acquired two years ago in a $190 million, all-cash transaction.

Digital Assets

FTX Europe to allow client withdrawals via new website

The Cypriot unit of failed cryptocurrency exchange FTX has launched a new website that it says would allow customers to withdraw deposits of fiat currency and crypto assets after months of suspension.

Retail FX

Liquidators apply to cancel SVS Securities’ FCA license

An update published today by Leonard Curtis said the UK high court of justice has approve their application to bring the special administration of the failed wealth manager SVS Securities to an end.

Digital Assets

Japan forms government panel to pilot digital yen

Japan’s Finance Ministry has created an advisory panel to look at the feasibility of issuing a central bank digital currency, otherwise known as “CBDC”.

Digital Assets

USDC sees massive $10.4 billion outflows in March

Cryptocurrency traders have withdrawn more than $10 billion from the world’s second largest stablecoin, USDC, in less than three weeks even as concerns over the fallout from the Silicon Valley collapse have receded.

Interviews

OSTTRA’s Joanna Davies goes beyond 30-30-30 data standard at FIA Boca 2023

FinanceFeeds Editor-in-Chief Nikolai Isayev spoke with Joanna Davies about OSTTRA.

Interviews

CloudMargin’s Stuart Connolly on how to manage collateral amid high rates at FIA Boca 2023

FinanceFeeds Editor-in-Chief Nikolai Isayev spoke with Stuart Connolly about CloudMargin’s SaaS platform, said to be the only cloud-native collateral and margin management system in the industry, at a time of stress due to rising interest rates.

Interviews

Baton Systems’ Alex Knight on solving post-trade with DLT at FIA Boca 2023

FinanceFeeds Editor-in-Chief Nikolai Isayev spoke with Alex Knight about Baton Systems’ about rising settlement fails, collateral management, and the profile of DLT beyond cryptocurrencies.

<