A weekly look at oil markets from the oil expert for SONAR.
Oil markets began the week with a sudden jolt to the system that raised the prospect of an outside bearish roundhouse right that could keep prices lower. By the end of the week, it was mostly forgotten as fundamentals took over.
Late Sunday, oil economist Philip Verleger sent out his weekly analysis. Verleger can be seen as something of an iconoclast in his analyses, because he brings an understanding of futures markets that isn’t just straight technical analysis to his overviews. He talked about the “Trump call,” which he described as the ever-present possibility that President Trump would, at any time, tweet that oil prices were too high and that OPEC was doing harm to the global economy. Verleger referred to it as a “call” because a call in the options market gives the owner the right, but not the obligation, to buy oil at a price lower than the market. His argument was that the ever-present possibility of a Trump anti-OPEC tweet would act as a downward force against the price of oil.
And right on schedule, on Monday, Verleger was proven correct. Trump tweeted early that morning that “Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile!” And with that, an upward movement in the price reversed course and headed into the red. WTI on CME settled at $57.26/barrel on Friday, February 22. On the day of the Trump tweet, it dropped 3.13 percent to $55.48.
But as it turned out, it was largely a one-day phenomenon. By the end of the week, markets were digesting several news items that spoke of a tightening supply/demand balance and prices had moved higher (though as the week drew to a close, they were still lower than they were a week earlier).
Among the bullish factors in the market this past week, the first estimates of what OPEC produced in February began to emerge. The initial reports are generally considered somewhat less than reliable and a bit rushed. Start with the International Energy Agency (IEA) estimate that OPEC production in January was 30.83 million barrels per day (b/d). There are other estimates but the IEA number is more than acceptable as a point of reference. The consulting firm of JBC Energy estimated output during the month dropped 550,000 b/d to 30.39 million b/d. A Bloomberg report was roughly the same. It won’t be until the week of March 11 that we’ll get estimates of groups like the IEA and OPEC itself. But the early numbers certainly are reliable enough to bolster the fact that tweet or no tweet, OPEC did make big cuts in February and its production is down near the level expected
– There were two more smoke signals from the hunt for an indication of what oil prices might do when shipping regulation IMO 2020 gets implemented on January 1, with the expectation that it will have some spillover impact on diesel. The price indications that are out there are focused on the price of what is becoming known in the industry as VLSFO, for very low sulfur fuel oil. It’s a product that up until recently barely existed, but it’s projected to be a major tool that will allow ships to reach the new mandate that their fuels contain no more than 0.5 percent sulfur from a current cap of 3.5 percent. There is nothing in the diesel market yet that is giving any sort of indication of supply problems, though the process to make VLSFO is expected to pull some diesel away from its current markets. And you can say the same thing about the market for VLSFO. A trade took place this past week in what is known colloquially as “the Platts window,” which showed the price of VLSFO in the U.S. being not that much higher than high sulfur fuel oil, the benchmark for the existing fuel that powers ships, known as bunker fuel. And in a presentation by a Goldman Sachs representative at a prior week’s conference dedicated to IMO 2020, the projected spreads between the new low sulfur fuels relative to existing benchmarks were also not seen as set to move sharply away from the broader market. But at the same time, various panelists were very clear – this is the biggest change in the fuels market in a long time, and might be even bigger than those of the past. It was also noted by shipowners that they intend to start the switchover to new fuels well before January 1. September might be the crunch time.
– The weekly report of the U.S. Energy Information Administration reported that U.S. crude inventories rose more than 8 million barrels. This was well more than the various forecasts in the market and came even as U.S. refiners were operating at a reduced level due to regular maintenance season. That drop in inventories was fueled by the lowest level of crude imports since early 1996. It lends support to the idea that OPEC is cutting in general and Saudi Arabia is cutting its supplies specifically to the U.S. The news that the U.S. only imported 346,000 b/d of Saudi crude in the week ended February 22 is a number not seen for a full month since 1985, just before the Saudis got tired of giving up market share to everybody else and flooded the market with supply, just to show who was boss. (That is pretty much what they did, though the specifics were a lot more complicated.)
– There were some news developments that could be seen as bearish. The U.S. government announced it was going to sell 6 million barrels out of the Strategic Petroleum Reserve (SPR). Given the fall in U.S. import dependence, the SPR, if it was a pension plan, would be viewed as wildly overfunded. The guidelines are that it should have 90 days’ worth of imports. Given the plunge in the need for the U.S. to import crude, that number has shot up to more than 200 days at some points. Congress several years ago authorized sales from the SPR with some of the funding to be used to modernize the SPR. These sales are expected to continue in coming years.