Baker Hughes

Oil lost more than 4% since the start of Monday, retesting the lower end of its range for the last three months. WTI briefly traded below $67.0 and Brent below $72.   On Tuesday, oil is enjoying buying at the lower end of the range, gaining more than 1.5% since the start of the day. However, there are big questions about whether the current rally can gain traction. Over the past three months, oil has repeatedly found itself close to current levels, from which it has bounced on technical factors (accumulated local oversold conditions) and several announcements of production cuts by OPEC+ members. More interestingly, the current sell-off in oil is going against the news. Prices peaked locally shortly after Saudi Arabia announced a voluntary production cut of 1m BPD and Russia's plans to cut production from next year. In addition, the US government announced at the end of last week that it would begin buying oil for the Strategic Petroleum Reserve. According to Baker Hughes data released on Friday, the number of active rigs (oil + gas) fell by a further 1 to 695.     More interestingly, the sharp fall in oil prices since mid-April has been accompanied by impressive demand for equities on the back of strong macro data. It is no coincidence that OPEC+ is so strongly defending current levels. The $65 area has acted as an important mode switch for oil. A break below triggered a bullish capitulation that halved the price before a steady move higher in 2008, 2014 and 2020. The ability to hold higher triggered a rally that doubled the price in 2007, 2010 and 2021.     The fact that the 200-week moving average is being fought over adds to the epochal nature of the current battle between the bulls and bears. And the persistent, repeated attempts to break below this line since February is more of a bearish signal. Graphically, it looks more like what we saw in 2008. And that is an argument for oil to head towards $30 now, although it would still be prudent to wait for consolidation below $60 to gain more confidence in a downside move.  

The Commodities Feed: More positive US data Oil edged higher yesterday following some good US macro data. However, this data also increases the likelihood of further rate hikes. And the expectation of further hikes will ultimately provide resistance to commodity prices moving significantly higher.   Energy - ARA gasoil inventories fall further The oil market managed to edge higher yesterday with ICE Brent settling a little more than 0.4% higher on the day. This follows first-quarter US GDP being revised significantly higher, while jobless claims also fell over the week. However, stronger-than-expected US macro data also increases the likelihood of further rate hikes from the Fed.  Growing expectations of further hikes is one of the factors which is capping the upside in the market, while on the downside, the belief that OPEC+ will take further action if there is significant further weakness provides a floor to the market. As a result, the oil market continues to trade in a fairly rangebound manner. The latest data from Insights Global shows that gasoil inventories in the ARA region fell by 35kt over the last week to 2mt. This is the lowest that gasoil inventories have been in the region since December and stocks are now around 300kt below the 5-year average for this time of year. It is this tightening which continues to provide support to middle distillates with the ICE gasoil crack continuing to trade around the US$20/bbl level. Refinery outages have contributed to the tightening, but a return of these refiners, the ramping up of new capacity over 2H23 and demand concerns suggest that further upside is likely limited. China will be releasing PMI data today. The manufacturing PMI has been in contraction territory for the last two months and the expectation is that we will see yet another contraction over June. A weak set of data will not be great for commodities, particularly for the metals complex. Other releases on the calendar for today include the Baker Hughes US rig count data. And if the trend seen for the last several months holds, we will likely see a further slowdown in US drilling activity. In addition, the CFTC and ICE will be releasing their latest Commitment of Traders reports. Price action over the last reporting week suggests that speculators should have reduced their net long position in ICE Brent.

The Commodities Feed: Further US SPR purchases The oil market had a strong end to the week following the extension of Saudi voluntary cuts earlier in the week. For this week, markets will be focused on US CPI data on Wednesday, whilst specifically for the oil market, we have the IEA and OPEC oil market reports released later in the week.   The oil market managed to pull off a second consecutive week of gains with ICE Brent settling almost 4.8% higher last week. Cuts from both Saudi Arabia and Russia have provided some support, although the market will have to continue to contend with macro uncertainty, which has capped the market over the last couple of months. The recent action taken by Saudi Arabia will likely provide some comfort to longs as it sends the signal that the Saudis are committed to putting a floor under the market. The latest positioning data shows that speculators increased their net long in ICE Brent by 25,106 lots over the last reporting week to 184,906 lots as of last Tuesday. This move was predominantly driven by fresh longs entering the market, with the gross long increasing by 16,881 lots. Meanwhile, for NYMEX WTI, speculators increased their net long by 23,820 lots to 95,363 lots. This was driven almost exclusively by short covering. At 112,155 lots, the gross short in WTI is still sizeable and so with the right catalyst, there is the potential for a short-covering rally. Another factor which is providing some degree of support to the market is the refilling of the US Strategic Petroleum Reserve (SPR). On Friday the Department of Energy (DoE) announced that it will be looking to purchase around 6MMbbls of US sour crude oil for delivery in October/November.  Up until now, the DoE has successfully tendered for 6.3MMbbls, with this volume set to be delivered in August and September. There had been reports that the DoE was looking to buy roughly 12MMbbls this year, and if we see the total volume awarded in the latest announcement, that would get us to this 12MMbbls already. A large explosion at a Mexican platform, which was sadly deadly, saw Pemex reduce oil output by 700Mbbls/d. However, the bulk of these shut-ins appears to have been precautionary and 600Mbbls/d of this output has already returned, according to the company. Drilling activity in the US continues its decline with the latest data from Baker Hughes showing that the number of active US oil rigs fell by five over the week to 540. This is the lowest number since early April 2022. The number of active oil rigs in the US has fallen by 81 since the start of the year. Lower drilling activity suggests more limited supply growth. And this is a trend that we have seen in the EIA’s US crude oil supply forecasts with less than 200Mbbls/d of US supply growth expected in 2024. The EIA will release its latest Short-Term Energy Outlook on Tuesday, which will include US production forecasts for the remainder of 2023 and 2024. In addition to the EIA’s Short-Term Energy Outlook release on Tuesday, both OPEC and the IEA will release their latest monthly oil market reports on Thursday. Given the macro uncertainty, the market will likely be focused on any changes to demand forecasts in both reports. Away from energy markets, the big macro release this week will be US CPI numbers on Wednesday, which will likely further shape market expectations on how much more monetary tightening we could see from the US Federal Reserve in the months ahead.

The Commodities Feed: China’s GDP falls short The complex has come under pressure this morning following China’s second quarter GDP data, which came in below market expectations. The data will do little to ease concerns over the Chinese economy.   Energy – China data weighs on oil Oil’s venture above US$80/bbl was relatively short-lived, with Brent settling below this level at the end of last week. Downward pressure has continued during early morning trading today following weaker than expected Chinese GDP data. A slight recovery in the USD has also put some pressure on oil whilst supply concerns have also eased, with both the Sharara and El Feel oil fields in Libya reportedly resuming after a brief shutdown last week due to protests. However, it appears as though loadings at Shell’s Forcados oil terminal in Nigeria remain halted after a possible leak was discovered last week. The terminal was set to ship 220Mbbls/d in July. This follows a number of other recent supply disruptions in the oil market, including Kazakh output being affected by power issues and Mexican output bieing hit by a platform explosion, whilst the market is still awaiting the resumption of Kurdish oil flows via the Ceyhan terminal in Turkey. Speculators increased their net long in ICE Brent over the last reporting week, buying 48,123 lots to leave them with a net long of 233,029 lots as of last Tuesday. This is the largest net long speculators have held since April. However, the current speculative long is likely to be somewhat larger, given that this data will not include the post-US CPI rally. The Commitment of Traders report also shows that producers appear to have taken advantage of the more recent strength by selling into the rally, with the producer gross short increasing by 34,930 lots over the last reporting week. The latest rig count data from Baker Hughes shows that the number of active US oil rigs continues to trend lower. The oil rig count fell by 3 over the last week to 537, which is the fifth consecutive week of declines. The number of active rigs has fallen from a year-to-date peak of 623 in mid-January. Whilst up over the last week, Primary Vision’s frac spread count does suggest that completion activity in the US has plateaued over the last few months. China released its second quarter GDP numbers this morning, which showed that GDP grew 6.3% year-on-year, falling short of market estimates of 7.1%. Even so, quarter-on-quarter GDP numbers came in line with consensus at 0.8%. June industrial production came in above expectations at 4.4% YoY, whilst retail sales in June slowed to 3.1% YoY from 12.7% previously, which was also below expectations of 3.3%. The weaker than expected GDP numbers are likely to continue to cause concern for markets. Digging a little deeper into industrial output numbers shows that apparent domestic oil demand was strong over June, coming in at 14.86MMbbls/d, up 13.6% YoY and 1.4% MoM. However, the oil market clearly seems focused on weak headline numbers.

The Commodities Feed: Russia-Ukraine tensions add to oil supply risks The Ukrainian drone attacks on Russian oil tankers in the Black Sea region have added to supply risks for the crude oil market. Meanwhile, the Joint Ministerial Monitoring Committee (JMMC) meeting of OPEC+ countries ended without any recommendation to change oil output levels for now.   Energy – Ukrainian drone attacks on Russian oil tankers ICE Brent settled above US$86/bbl on Friday as tensions in the Black Sea region increased further after Ukraine declared Russian ports in the Black Sea as ‘war risk’ areas and cautioned ships against using them. Ukrainian drones also attacked a Russian oil tanker over the weekend reflecting heightened tension within the region. The Black Sea route accounts for nearly 15-20% of the oil that Russia sells daily on global markets and is also a major transit corridor for Kazakh crude. In the recent JMMC meeting, the OPEC+ group noted its satisfaction regarding the compliance with the output levels by member countries and made no recommendation for any change in production strategy at this stage. The committee recognised the additional voluntary cuts from Saudi Arabia and Russia to balance the oil market. The group has changed the frequency of meetings from once a month to once every two months, with the next meeting scheduled for the first week of October. Saudi Arabia increased its official selling price for Asia and Europe for September deliveries following its decision to also extend the output cuts for the month. Saudi Aramco has increased the premium of Arab Light crude for Asian buyers by US$0.30/bbl to US$3.5/bbl for September deliveries. The increment was much steeper for European buyers with the new premium set at US$5.8/bbl compared to US$3.8/bbl for August deliveries. The premium for US buyers was left unchanged at US$7.25/bbl. The latest data from Baker Hughes shows that the US oil rig count declined by four for an eighth consecutive week to 525 over the last week. This is the lowest number of active rigs seen since 18 March 2022. The recent strength in oil prices should have seen higher capital expenditure and increasing rig count in the country, however, the oil exploration companies appear to still be assessing the stability of the current market strength. Lastly, the latest positioning data from CFTC show that speculators increased their net long position in NYMEX WTI for a fifth consecutive week by 13,855 lots over the last week, leaving them with net longs of 205,959 lots as of 1 August 2023, the highest since the week ending on 18 April 2023. Meanwhile, money managers increased their net longs in ICE Brent by 18,728 lots over the last week for a second consecutive week, leaving them with 215,368 lots as of last Tuesday.    

The Commodities Feed: Oil fundamentals remain supportive The oil market remains well supported on the back of constructive fundamentals, and Russia’s ban on diesel and gasoline exports also adds support. The calendar this week is looking fairly quiet.   Energy - Speculative appetite grows The oil market has held relatively steady in recent days with tightness in the physical market coupled with Russia’s recent export ban on diesel and gasoline offset by a fairly hawkish FOMC meeting last week. As a result, Brent continues to hold above US$93/bbl. Speculators continue to become more constructive towards the market with the speculative net long in ICE Brent growing by 17,904 lots over the last reporting week to 265,531 lots as of last Tuesday. This is the largest net long speculators have held since March, and the increase over the week was predominantly driven by short covering. Similarly, speculators increased their net long in NYMEX WTI by 15,084 lots over the reporting week to 294,396 lots - the largest position held since February last year. However, speculators cut their net long in ICE gasoil, which fell by 6,940 lots over the week to 59,359 lots as of last Tuesday. The current net long is likely somewhat larger than this, given the move seen in the gasoil market following Russia's ban on diesel and gasoline exports. As we mentioned in our note last week, while the ban only reinforces our supportive view on middle distillates, we do not believe it will remain in place for long, given the domestic storage constraints that will be soon faced by not allowing roughly 1MMbbls/d of diesel exports. The latest data from Baker Hughes shows that the US oil rig count fell by 8 over the last week to 507. This is the first weekly decline in 3 weeks and sees a resumption in the fall we have seen for much of this year. The number of active oil rigs has fallen by 114 rigs since the start of the year. The fall in rig count this year is what has given OPEC+ the confidence to cut output without having to worry too much about losing market share to non-OPEC producers. European natural gas prices managed to settle more than 9% higher over the course of last week. This is despite strike action at Australian LNG facilities coming to an end, along with Norwegian gas flows continuing to recover as capacity at the Troll field returns following maintenance. With EU storage almost 95% full and supply risks subsiding, we would expect to see some downward pressure on the front end of the curve.

Energy – OPEC crude oil production softens in November Sentiment in the oil market remains negative this morning, with both ICE and WTI futures trading almost 1% lower after the announcement from the OPEC+ meeting failed to convince the market about a tighter oil balance in the immediate term. Pessimism over compliance with the new deal remains one of the major concerns for the market for now. Initial data shows that OPEC crude oil production dropped to around 28.05MMbbls/d in November 2023 compared to 28.19MMbbls/d in October 2023, according to a Bloomberg survey. The BBG survey estimates that supply from Iraq and Nigeria dropped by 50Mbbls/d each, while Iran and Kuwait also lowered production by 40Mbbls/d each. Higher production from Saudi Arabia and Libya helped offset some of the production losses for the month. Weekly data from Baker Hughes shows that the US added five oil rigs over the last week, taking the total oil rig count to 505, whilst the gas rigs fell by 1, taking the total rig count (oil & and gas combined) to 625 for the week ended 1 December. US oil rigs have now increased to their highest level in nearly two months, although the recent weakness in oil prices could weigh on further rig additions over the coming weeks. The Al-Zour refinery in Kuwait is now fully operational as the third of the three mini refineries was brought online on Sunday. This will gradually increase the refining capacity of the facility to 615Mbbls/d from the current capacity of 410Mbbls/d. The plant halted its operational activities last month after a fuel gas feed was halted. Al-Zour is one of the largest oil-processing facilities in the Middle East and it is expected to boost the nation’s refining capacity to about 1.5MMbbl/d. The latest positioning data from CFTC shows that speculators decreased their net long position in NYMEX WTI by 6,408 lots for a ninth straight week over the last week, leaving them with net longs of 98,137 lots as of 28 November 2023, the lowest since the week ending on 4 July 2023. In contrast, money managers increased their net longs in ICE Brent by 11,630 lots over the last week after reporting five consecutive weeks of decline, leaving them with a net long position of 166,735 lots as of last Tuesday.