Russian crude – Weekly bulletin #2
Price movement
We can observe that there has been a significant fall in the general prices of crude oil following the trend already set during the previous weeks. Russia’s oil production has hit record high during the previous month at 11.41 million bpd and OPEC’s forecast of a rather slowing demand for next year have contributed to this drop.
Nevertheless, Iranian sanctions were put in place on 4th November and the OPEC proposal to cut 1.4 million bpd in production 10 days later led the market to believe in recovery of the prices. This was halted as the USA are expected to boost their production to 11.43 million bpd in the last quarter of 2018 and continue ramping up.
Moreover, American crude stocks climbed to 426 million barrels and their weekly build in inventory was 8.79 million barrel, stated by the API, almost 5 million over analysts’ expectations. These are all factors that have contributed to halt the price recovery and to push them further down.
This week was also an important turning point on prices as differential for the Urals went from a discount of 2.18$/bbl on October 15th to a discount of 0.18$/bbl on November 15th. Event explainable as the market reacted prior to US sanctions by shifting its supplier and paying the price.
As for the ESPO, the spread has also known a similar variation since they were traded at 3.60 to 3.70$/bbl premium during mid-October to almost 6$/bbl premium for mid-November contract.
This event is explained by the Chinese refiners needing to fulfil their quotas by the end of the year if they do not want to see it diminished for 2019.
Supply and demand dynamic
The physical trade market was trading around 85$/bbl in the first days of October. The high price for BFOE (BFOE is a forward contract for light-sweet North Sea crude oil that can be satisfied with any of four grades of crude: Brent, Forties, Oseberg, or Ekofisk. The contract was created to add volume to the market for Brent as production from the Brent field has declined.) grades push many refiners to medium sour grades like Urals crude.
“I’m not going to say anything about whether or not we need to limit oil production, we have to be very careful, as every word impacts the state budget,” President Vladimir Putin said. Following the announcement of the OPEC to reduce their production, participants of the previous agreements will meet in early December to discuss the about the deal, which may cause a cut in previous output targets.
Despite the disputes over price volatility, the Russian president is rather pleased with the current price.
Internationally geopolitical events have heavily influenced once again global crude prices. Market participants focus their attention on the rising tension between US and China and also the deteriorating relation between Saudi Arabia and US due to the murder of the journalist Jamal Khashoggi.
Geopolitical risk and increased Saudi crude production are among the factors that have heavily influenced global crude prices and that contributed to the spike in market volatility during October.
Recommendation for the future
The forward curve was still backwardation until October 19 and almost contango around October 31. Dated Brent dropped significantly during October and the Dated Brent CFD forward curve moved from a steep backwardation in the first trading days to almost a contango by the end of October. As of the state of the market on 9th November, we can expect that there should be a slight contango over the next six months. Taking into account the sanctions applied by the USA and a probable cut of production from OPEC, we recommend to be long for the next 3 months.
Sources :
‘Crude Build Halts Oil Price Recovery’. OilPrice.com. Accessed 15 November 2018. https://oilprice.com/Latest-Energy-News/World-News/Crude-Build-Halts-Oil-Price-Recovery.html.
‘Crude Recovery? OPEC Eyes 1.4 Million Bpd Production Cut’. OilPrice.com. Accessed 14 November 2018. https://oilprice.com/Energy/Crude-Oil/Crude-Recovery-OPEC-Eyes-14-Million-Bpd-Production-Cut.html.
‘Far East Russian ESPO Blend Crude Premiums Surge for Nov on Demand from China | S&P Global Platts’, 21 September 2018. https://www.spglobal.com/platts/en/market-insights/latest-news/oil/092118-far-east-russian-espo-blend-crude-premiums-surge-for-nov-on-demand-from-china.
‘IEF Head: Oil Prices To Wobble In $60-80 Range Short Term | OilPrice.Com’. Accessed 13 November 2018. https://oilprice.com/Latest-Energy-News/World-News/IEF-Head-Oil-Prices-To-Wobble-In-60-80-Range-Short-Term.html.
‘Non-OPEC Oil Output Soars Despite Price Slide’. OilPrice.com. Accessed 14 November 2018. https://oilprice.com/Energy/Crude-Oil/Non-OPEC-Oil-Output-Soars-Despite-Price-Slide.html.
‘OPEC+ Said to Weigh Bigger Output Cut on Increasing Risk of Glut – Bloomberg’. Accessed 15 November 2018. https://www.bloomberg.com/news/articles/2018-11-14/opec-said-to-weigh-bigger-output-cut-on-increasing-risk-of-glut.
‘Russia Committed to Continuing OPEC Cooperation, Satisfied with Current Oil Price: Putin | S&P Global Platts’, 15 November 2018. https://www.spglobal.com/platts/en/market-insights/latest-news/oil/111518-russia-committed-to-continuing-opec-cooperation-satisfied-with-current-oil-price-putin.
‘Russia’s Oil Production Sets New 30-Year-High Record In October’. OilPrice.com. Accessed 5 November 2018. https://oilprice.com/Latest-Energy-News/World-News/Russias-Oil-Production-Sets-New-30-Year-High-Record-In-October.html.
‘U.S. Mulls Fresh Sanctions On Russian Oil | OilPrice.Com’. Accessed 13 November 2018. https://oilprice.com/Latest-Energy-News/World-News/US-Mulls-Fresh-Sanctions-On-Russian-Oil.html.