Market Update 06/08/2020

Overview

Energy prices are mixed with crude oil and ULSD lower, but RB higher. Prices overnight reached fresh 3-month highs on the back of the extension of OPEC cuts and a sharp hike in Saudi OSPs this weekend.

OPEC+ agreed to extend their output curbs at 9.7 mmbpd for one month. Iraq and Nigeria agreed to compensate for overproduction in May, although it was not clear how Baghdad would reach an agreement with oil majors on curbing Iraqi output. Iraq produced 520 mbpd above its quota in May, while overproduction by Nigeria was 120 mbpd, Angola’s was 130 mbpd, Kazakhstan’s was 180 mbpd and Russia’s was 100 mbpd, OPEC+ data showed. (Reuters)

Analysts are skeptical. "Given that there is no enforcement mechanism, it is difficult to believe that the likes of Iraq will suddenly start to comply with the deal," as per an ING analyst. While a UBS analyst said "while some nations might improve on previous cuts, it is unlikely they will fully honor their pledges." (WSJ) A Goldman Sachs analyst sees the OPEC deal as possibly self defeating as U.S. shale producers may turn the taps back on. The analyst said U.S. exploration and production companies have started to borrow in the high-yield debt market again. (WSJ)

Saudi Arabia raised their OSPs to Asia by the most in 20 years. They raised prices by $5.60 to $7.30. That compares with an expected increase of about $4, according to a Bloomberg survey of eight traders and refiners. Prices to Europe were raised by $3.90 to $4.20 and to the Mediterranean by $4.20 to $5.30. Prices to the U.S. rose by 40-60 cents.

Lighter grades of crude rose more than heavier ones as the Saudis see demand returning for lighter products such as gasoline and jet fuel. But, the Bloomberg article voiced refiner concerns from Europe and Asia that the new pricing would crush their margins.

Libya is said to be poised to bring 400 mbpd of production back online in July, according to Platts. Libya exported some crude oil and condensate from its Zawiya terminal this week for the first time in 4 months. (Platts)

Platts reports that Asian sentiment for Gasoil and jet fuel is good as flights resume and regional demand emerges, though supply flows from India and China may cap the upside, the article said.

Chinese crude oil imports in May hit a record 11.34 mmbpd as it is believed that these were purchases made taking advantage of low prices seen in March and April. The imports were up 19.2% vs. May 2019. January through May imports were +4.5% YOY at 10.4 mmbpd. Platts reporting says that Chinese crude imports may slow in the 3rd quarter due to rising oil prices and the Saudi OSP hikes. One teapot refiner said that they "will take a breather for August delivery.” (Platts)

Friday's Baker Hughes U.S. oil rig count fell by 16 units.

CFTC data seen Friday showed that money managers raised their net length in WTI futures/options on ICE/CME combined by a total 7,225 contracts. RB net length fell by 7,946 contracts for the period ended Tuesday 6/2. ULSD positions were little changed. Reuters reports that Brent length held by money managers on ICE fell by 2,000 contracts. Gasoil length rose by about 8,000 contracts. Funds have been net buyers of European gasoil for three weeks running, and last week’s purchases were the largest yet, indicating traders are trying to position themselves ahead of an anticipated improvement in distillate margins, as per a Reuters analyst.

Technicals

Technically, we see Crude oil and RB as overbought. And in the case of RB there is a mean reversion set up from Friday’s settlement. WTI support is seen at 3818 then at 3635-38. Resistance comes in at 3968 then 4044. These are the highs from Friday and today.

RB has its upper bollinger at about 1.2280. A settlement below that level confirms the mean reversion and likely will see prices retreat further, especially as the DC momentum indicator shows an extremely overbought condition. July futures have support at 1.2039-46. The low of 1.2046 was seen on the opening last night. Below this, we see support at 11769-75. Resistance comes in at 1.2324-48 than at the overnight high of 1.2444.

ULSD support lies at 1.1080-1.1105 for July futures. Its resistance is seen at 1.1777, which was tested with the overnight high being 1.1824. 

Natural Gas

NG futures are near unchanged, having traded lower during the overnight hours on fears of a rise in associated NG production as U.S. producers are seen raising their crude output. NGI reporting has falling LNG demand adding to pressure on NG prices.

Friday's NG rig count, as per Baker Hughes data, saw a fall of 1 unit. 

Friday's CFTC report showed that money managers raised their net short position in NG on the CME in the week ended last Tuesday by 4.162 contracts. Their net short total is 11,493 contracts as per the report.

Technically, NG DC momentum is negative and the contract seems to have hit a wall over 1.85 in the latter half of last week. We see support for NG spot futures at 1.740-1.742. Resistance above is seen at 1.811-1.816, ahead of the 1.85 area. The 1.816 high seen overnight happened on the opening of the session last night. 

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