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FxWirePro: Crude inventory updates and WTI/Brent strategic hedging insights

Yesterday, US EIA’s inventory report is not hot news by now, but it’s worth keeping track of insights in order to forecast the underlying prices of crude prices.

This week’s report was bullish for crude, gasoline, and distillate. Total US commercial crude and product stocks drew by 9.5 Mb last week and over the last four weeks have declined by 36.9 Mb or 1.32 Mb/d. US total 4w oil product demand remained very strong at 21.16 Mb/d, up 925 kb/d YoY (+4.6%).

Consequently, the crude prices rose to a fresh eight-week high in European trade on Thursday, as data showing a fourth consecutive week of declines in U.S. crude inventories added to optimism that the market was rebalancing.

Globally strong refining margins are being driven by healthy product demand growth across the barrel in all key regions, and unplanned outages in the Americas and Europe. The strength in margins has been particularly noteworthy because it has continued in recent weeks even while crude prices have been moving higher.

We remain cautious on crude, because global refinery runs are expected to drop by 0.9 Mb/d in September vs August, and decline another 0.6 Mb/d in October vs. September. Healthy margins may mean there is some modest upside to the outlook for global runs, but the overall season pattern in September and October, driven by planned maintenance, is still expected to be bearish.

Crude stocks drew 7.2 Mb (vs. -3.0 Mb consensus) to 483.4 Mb and have now fallen 921 kb/d over the last 4 weeks. Stockdraws were seen in all PADDs except for PADD 1, where refinery utilization of 84.8% remains lower than the 5y av., due to technical problems. Stocks declined in PADDs 3 and 2 by 4.5 Mb and 1.7 Mb, respectively; the entire PADD 2 draw was in Cushing (vs. -1.0 Mb consensus).

The stockdraws were driven by higher crude runs (+166 kb/d) and a rebound in exports (+302 kb/d). Total US crude output was down -19 kb/d, driven by maintenance in Alaska (-54 kb/d).

However, lower 48 output increased 35 kb/d and reached 9.01 Mb/d, a level not seen since 31 July 2015.

Trade recommendations:

Add longs in December 2017/December 2018 Brent time spread is advocated. We see better value in looking for curve flattening as tighter fundamentals compete with increased producer hedging the coming weeks as spot Brent prices flirt with $50-52/bbl and calendar 2018 WTI approaches $48-49/bbl. - Go long December 2017/December 2018 Brent time spread on July 21, 2017 at -$1.82/bbl. Trade target is -$2.00/bbl.

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