What's Moving In Oil?

| About: The United (USO)

By Rupert Hargreaves

The price of Brent crude charged through the key $50 a barrel level this week and pushed higher to around $52.75/bbl in early trade on Thursday morning before sliding back to $49.50/bbl in trade on Friday afternoon. The very fact that oil has recovered to this level, a level not seen since November last year, helped current degree of optimism in the oil sector.

However, away from the headline price movement the fundamentals of the petroleum industry remain mixed, as Credit Suisse’s June 8 Flowing Oil Chartbook highlights.

Oil market events

The main event of the past six months and the most significant for the long-term health of the oil market is Saudi Arabia’s decision to maintain crude production capacity at 12.5 million barrels of oil per day through 2020. This commitment removes the most significant medium-term upside crude supply risk.

Saudi Arabia announced in its “National Transformation Program 2020” its plans to “maintain petroleum production capacity” at 12.5 Mb/d through the end of the decade. The ceiling helps alleviate concerns of any short-term Saudi export surge. When coupled with the Kingdom’s proposal of a new OPEC production ceiling at last month’s meeting, analysts are highly confident that these two developments show that the Kingdom is unlikely to flood the market with oil during the second half of the year.

Tightening differentials in Saudi oil pricing also corroborate the idea that a re-escalation of the oil war is unlikely in the near future. Saudi differentials for Arab light continue to tighten in Asia and the US, while Northwest Europe prices remain at a discount.

Nonetheless, on the storage front, there is little in the way of good news. Europe is grappling with refinery strikes in France and floods across France and Germany, which could impact demand, inventory and possibly even pricing for the relevant period given the importance of the Rhine River to product shipping.

Meanwhile, over in the US higher refinery utilization and failing distillate demand led to the first week of distillate inventory builds after seven straight weeks of draws. Credit Suisse doesn’t expect this trend to continue. Instead, the bank believes that US inventory draws will accelerate this summer so long as production continues to roll over. The outlook on American motorist consumption of gasoline is very optimistic for the summer driving period.

Disappointing non-farm payroll data

After last week’s disappointing non-farm payroll data from the US, and the subsequent lowering of expectations around the Fed rate increase, it is fair to say that most of the market has become increasingly cautious about the outlook for the US economy. But when it comes to oil demand, Credit Suisse is waiting for the data release of core US retail sales next Tuesday to provide an incremental data point on the trajectory of the US economy given the previously mentioned disappointing US non-farm payrolls. The bank goes on to say that so far, gasoline demand and gasoline refining margins here to be holding up just fine despite the disappointing jobs number. Furthermore, the personal savings rate remains high, while gasoline share of disposable income remains low.

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