Author: Brynne Kelly
During this unprecedented time, accumulating concrete data points has never been more crucial in forecasting the future. Yet the main drawback with concrete data is the mere fact that they exist means they are most likely stale and something that market prices were aiming to incorporate into futures prices months ago. Still, they are valuable if used to establish or validate assumptions.
Key concrete data to watch:
US Refiner Inputs of Crude Oil
End-user demand for crude oil products is one of the most significant drivers of oil prices and the largest user of crude oil is the refiners. Prior to the pandemic, the market was accustomed to relatively small weekly variations in refinery demand for oil, driven largely by short-term events like weather impairments or seasonality. We were jolted out of this pattern in 2020 by an unprecedented event that caused wild price swings while the market tried desperately to discover an end-state to work from.
Absent concrete data, forecasts of the impact to oil markets were all over the place. But, as weekly EIA data became available, the search for a bottom was finally found with a reversal in the downward slide in refiner inputs.
This had enough of an impact to move oil prices out of their free-fall (orange line, month 2 continuous WTI futures). Anyone catching the falling knife on the way down was finally rewarded with an uptick in prices. As oil now hovers around the $40 level, the market is asking what is the path forward. Is the concrete data accumulated to date enough to support a price direction going forward?
We are now faced with evaluating future data points against projections. Sure, this is always done, but it has never been more crucial since any hiccups in actual vs expected data at this point have the potential for large price swings.
Prior to the pandemic slow-down, 2020 crude oil inputs to refiners (solid red line) were running fairly close to that of 2019 (cyan line). As of last week's EIA report, crude oil inputs had had moved off of their lows and risen to almost 82% of 2019 levels. If we assume activity is moving closer towards normal than it is towards a complete shut-down, a gradual increase of refiner inputs towards 95% (of 2019 refinery input levels) by the end of 2020 is something to aim for. This is represented by the dotted red line below.
Historically, there is a seasonal pattern to contend with in the fall where refiner inputs of oil trend lower due to refining maintenance season, however many refiners have reported that they are using the current slowdown in operations to attend to maintenance early, so this may not be much of a factor this year. This at least provides a framework against which to measure future data points going forward.
US Weekly Rig Count
On the other side of the refiner input coin is crude oil production, which has slowed in light of reduced end-user demand. In response, drilling rigs have been drastically reduced. Rig counts are reported weekly by Baker-Hughes. The corresponding production from existing rigs is estimated by the EIA on a monthly basis in their Drilling Productivity Report (DPR, black and red line below) These production numbers are always revised over time as producer well data is verified.
Of course, in addition to the DPR data (which primarily captures shale production), the EIA also reports weekly total US crude oil production in their weekly inventory reports (blue line vs black line below). They are fairly consistent in direction, however, the weekly EIA production numbers show a slightly greater decline than shale production alone.
Along with production data, the DPR also provides the change from month to month in legacy production. Per the EIA, "the legacy production change is the change in total regional production from one month to the next, excluding production coming from newly drilled wells. Production from a well typically declines over time, as pressure from the formation around the wellbore is depleted. In the absence of new wells being drilled, the group of all existing wells in a region will decline in production from one month to the next." As this is part of the DPR, it is also a monthly figure. All monthly data is revised in each new report with the most recent 2 months most subject to change (red line below).
The sharp rebound in the legacy production change is either wishful thinking, or a reflection of the expected temporary nature of the drop in active drilling rig production. The next release date of the DPR is Monday July 13, 2020. It is within this report or next that we believe we will find some game-changing data. Examples being an increase in productivity per rig or increased production.
Another concrete data point is that of weekly gasoline supplied by refiners. Absent large swings in inventory, gasoline supplied is a proxy for gasoline demand (increases in gasoline supplied along with large increases in inventory counteract this data point as a proxy for current demand). Year-to-date gasoline supplied by refiners is down approximately 15% from 2019 levels (red line below). Estimates are for gasoline demand for full-year 2020 to come it at about 10% less than 2019 levels. To get to this full year 10% number, gasoline demand (aka, supplied) would need to rise to only a 5% discount from 2019 levels on average for the remainder of the year (dotted red line below).
As each weekly EIA report is released, look for how closely "Finished Motor Gasoline Supplied" is tracking to 2019 levels (absent large changes in weekly gasoline inventory). With 25 weeks remaining in this year, significant % deviations from last year levels will add up quickly. With gasoline inventories at record highs, increases in gasoline demand need to exceed that supplied by refiners AS WELL AS inventory draws.
US crude oil production grew steadily since 2016 as export margins were rising. The high-level proxy for export margins begins with the WTI/Brent spread (red, blue, green & purple lines below). As the WTI discount to Brent increased, US production continued to grow along with US export capacity. By 2019, US crude exports began to impact global prices and the spread narrowed from almost a $10.00 discount to only around $5.00 prior to the pandemic.
Since April, the spread has further narrowed and is hovering around the $2.25 level even as US production has fallen by almost 2 million barrels per day.
Another contributing factor to the increased WTI discount vs Brent was the reduction in US net imports of crude oil which kept pricing pressure off of the US Gulf Coast. As less crude needed to be drawn to US shores, WTI began pricing more as an export market vs an import market that needed to attract product.
This leaves a lot of unanswered questions going forward. Will US production be enough to supply the US market and fill any void left in global markets due to the OPEC+ production cuts? If so, we should expect the WTI discount to Brent to increase. However, should the impact of declining rig counts impair US production such that it can't meet it's own refining needs, the difference will need to be made up via oil imports. A return to the past of sorts to a time when WTI traded at a premium to Brent. In that way, relative oil prices are becoming a form of currency wars. Do we hope for a strong WTI/Brent spread or a weak one?
The EIA reported a total inventory DRAW of 4.90_million barrels for the week ending June 26, 2020. Crude oil alone posted a weekly DRAW of 7.20 (excluding SPR). This was the first substantial weekly draw in oil inventories since the start of the pandemic.
Year-to-date, total Inventory additions stand at a YTD BUILD of 162.80 million barrels (vs 167.70 last week). This leaves us 66 million barrels above 2019 levels and 69 million barrels above the 5-year average in just commercial oil inventory levels.
Commercial Inventory levels of Crude Oil (ex-SPR) and Refined Products are still above those seen in prior years for the same week ending (except those at Cushing). Keep an eye on 2020 inventory reversion towards the 5-year average.
Lee Taylor - Technical Levels
Resistance: 44.01 / 46.34 / 48.40
Support: 39.69 / 36.49 / 34.16
Technically not much happened last week in the Brent market and we still have confidence in our thought process. A break under the 39.69 early in the week could signal a quick $3.00 move down to 36.49. Resistance is easy to find as one can just focus on the gaps above – we find the same gap in the weekly chart, the daily September as we do the daily continuation which is 43.97-45.17. Look for Sep/Oct Brent to retest -.20 before it heads back to flat.
Resistance: 41.63 / 42.17 / 43.03
Support: 37.54 / 36.35 / 34.70
There is still one gap left in the crude market which appears in the August daily chart between 41.63 to 42.17. Until that gap is filled, most traders will hesitate or pause with an unbiased bullish sentiment. The crude market seems a little heavy and we believe we will have a pullback to our support levels. We did have a little bit of movement with Aug/Sep but that spread seems to be stuck in a 20-cent range of flat to -.20.
Resistance: 1.2755 / 1.3253 / 1.3548
Support: 1.2177 / 1.1859 / 1.0916
After retracing last week, it appears that gasoline is trying to make another attempt up to 1.3253. Gasoline spreads were somewhat choppy last week; but should be hitting resistance levels early this week – Sep/Oct at 907; Oct/Nov at 219; Nov/Dec at 135 and Dec/Jan at flat.
Resistance: 1.2534 / 1.3023 / 1.3783
Support: 1.1850 / 1.1328 / 1.0611
August Heating Oil did hold and settle above 1.1328 all last week; however, we still maintain that a break of that level projects down to 1.0709. Resistance seen here in Aug/Sep heat at -100 with a break of that level projecting up to flat. Support major below seen at -160 – please keep in mind that Aug/Sep is overbought based on the RSI model.