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Oil Market Report - October 2017

EXECUTIVE SUMMARY

Crude oil market climbed higher in October following some consolidation in the beginning of the month. Brent even closed the month above $60 per barrel, WTI got to its technical level $55 per barrel (upper channel trend). Some correction after the rally is likely now. However WTI has a potential to go close to $60 per barrel before OPEC November 30 meeting.

OPEC and non-OPEC countries are expected to make a positive decision on extension of the cut deal until the end of 2018 at their meeting on November 30. Saudi Arabia still looks very interested in OECD crude oil stocks rebalancing in 2018. Their national oil company’s IPO was under question after several rumors about Chinese offer to buy strategic stake in Saudi Aramco, but confirmations from Saudi crown prince and minister of energy, that IPO is still on track, persuaded the market.

Iraq military operation against Iraqi Kurdistan served as an additional factor of positive sentiment for the market. Since then the operation exports of crude oil from Kurdistan have been halved. There are other geopolitical risks as well: possible Venezuela’s default and political arrests in Saudi Arabia. Tightening in supply/demand balance makes the market more vulnerable to these geopolitical risks.

However, it is not only tightness that urged the price of Brent to break through above $60 per barrel. Speculative long positions of hedge funds are at the record levels. It is well said, that the long trade is overcrowded now, and when some speculative target is achieved massive closure of long positions will likely be the outcome.

OPEC November 30 meeting had better answer the expectations for the deal extension until the end of 2018 or else the price will definitely collapse. According to last comments there is no decision on extension among OPEC and non-OPEC countries. Crude oil prices surged on agreement among export countries that some extension is crucial for market rebalancing next year. It is only that the market assumed the extension of nine more months and probability of less extension for the deal to end in Summer is high actually, especially with price at $60 per barrel. It is also possible that no decision will be reached at the meeting in November and special meeting will be arranged for March next year to see changed supply/demand balance.    

Imports of crude oil to China stood at 31.03 mln tons in October, or 7.3 mln bbl / d, up from the same month a year earlier but well below about 9 mln bbl / d in September, according the data from the General Administration of Customs. However, China’s Ministry of Commerce set 2018 crude import quotas for non-state companies at 142.42 mln tons, which is 63% above 2017 level. Hence it is likely a temporarily negative factor. China’s crude oil purchases for its strategic petroleum reserves keep on going still. November data will be very interesting.

EIA in their weekly petroleum report estimated U.S. oil production at 9.62 mln bbl / d in the week ended November 3, the highest U.S. production number since 1983. Just a day before EIA had said U.S. oil production was at 9.2 mln bbl / d in September in their Short-Term Energy Outlook.

Surprisingly, last OPEC monthly oil report was strongly positive:

1) Global oil demand is expected to rise 1.51 mln bbl / d next year (previous forecast was 1.38 mln bbl / d).

2) Forecast for non-OPEC oil supply growth in 2018 was cut by 70 thsd bbl / d to 870 thsd bbl / d. 

3) As a result, estimate for demand for its crude in 2018 was raised by 360 thsd bbl / d.

4) The only possible negative moment in the report, that Saudi Arabia told OPEC it had pumped above 10 mln bbl / d in October, 83 thsd bbl / d higher than in September.

IEA announced closer to high crude oil price reality forecasts the following OPEC report day:

1) Oil "market balance in 2018 does not look as tight as some would like and there is not in fact a ‘new normal’ for crude oil prices.

2) Oil demand growth forecasts was cut by 100 thsd bbl / d for both 2017 and 2018 to +1.5 mln bbl / d and + 1.3 mln bbl / d respectively.

3) Warmer weather, rising non-OPEC output threaten oil market balance, a build in first half of 2018 is likely. Balances are likely to show oversupplied crude oil markets In Q4 2017, Q1 and Q2 2018. IEA sees return to oil oversupply by mid-2018 even with OPEC deal extension.

4) Non-OPEC supplies increased by 205 thsd bbl / d m-o-m in October to 58.05 mln bbl / d, 225 thsd bbl / d higher comparing on the year over year basis.

5) Non-OPEC oil supply is expected to rise by 700 thsd bbl / d in 2017 to 58.1 mln bbl / d and 1.4 mln bbl / d next year to 59.5 mln bbl / d, led by US output.

6) In next 10 year more than 80% of oil output growth is expected to come from U.S.

EIA in its Short-Term Outlook expected the oil market undersupplied by 0.17 mln bbl /d in 2017 (-0.32 mln bbl / d previously), oversupplied by 0.29 mln bbl / d in 2018 (0.18 mln bbl / d previously).

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