FxWirePro: EIA’s inventory check hints Crude’s bullish hopes but not at the drop of a hat, OPEC likely to be game changer – Bid long WTI vs Brent Dec’18 spreads

Crude prices were stronger after another large drawdown in inventories buoyed investor sentiment. The EIA weekly report showed that US stockpiles fell by 1.86 million barrels last week. This was a little lower than expectations, which saw prices dip slightly on their release. The report also showed that US production rose for a fifth week in a row to 9.66mb/d. However, it ultimately reversed a trend of rising inventories over the past few weeks which investor took as a positive.

However, a disruption to the key Keystone pipeline between Canada and the US provided some support to spot prices. The pipeline, which delivers into Cushing, the pricing point for WTI, moves about 590kb/d into the US. The timing of a restart is yet to be determined. Speculation continued to swirl around the market about the extension of the production cut agreement. OPEC is currently hearing from a variety of industry experts on the state of the US shale industry before meeting in Vienna to discuss whether to extend the curbs.

Well, this week’s report seems to be bullish for crude, neutral for gasoline, and bearish for distillate. Total commercial crude and refined product stocks were flat at 1259.7 Mb, but the surplus to the 5y average rose 4.1 Mb WoW to 92.4 Mb because total stocks normally decline this time of year. On a 4w av. basis, product demand growth was weak - almost flat - rising by only 18 kb/d YoY to 19.88 Mb/d (+0.1% YoY).

However, the deal to curb production is due to expire in March 2018, but OPEC will meet on Nov. 30 to discuss the outlook for the policy, and it is expected to extend the cuts. Top exporter and de-facto OPEC leader Saudi Arabia are lobbying for extended output restrictions.

Trading tips: Long NYMEX WTI Dec18 vs ICE Brent Dec18 at -$5.25, target spread -$3.20 Since Hurricane Harvey hit the US Gulf Coast in late August, NYMEX WTI has traded at an unusually wide discount to ICE Brent (though the widening started well before the storm). The spread on the front-month contract reached $7 in late October and has since stabilized around $6.

We project that in 2018, the WTI discount to Brent will narrow to $4 at the front-end of the curve, as crude stocks in the mid-continent and Cushing will draw, finally following crude draws seen on the USGC and in OECD Europe since 2Q17.

We expect mid-continent refinery runs to increase in December and to stay high throughout the winter. In addition, new capacity from various pipelines is expected to decrease flows into Cushing (from the Permian) and increase flows away from Cushing (to Memphis).

We, therefore, recommend buying Dec 18 NYMEX WTI vs Brent at current levels ($5.25). The current WTI-Brent spread curve is in backwardation from May 2018 onwards, which should further benefit the trade. Should the spread not narrow by April however, we recommend closing the trade on a steeply contangoed spread curve.