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Better than expected OPEC compliance in Q1’17 and stronger Chinese crude imports for SPR stock building underpin most of the improvement in the oil market balance. We have lifted expectations for Chinese SPR purchases for the balance of the forecast period by 0.2 mbd, given the continued strength of this relatively opaque source of demand for crude.
Moreover, with US crude supply once again increasing and the need for Atlantic Basin crude markets to clear excess inventories, it is apparent that Asian demand for crude will become an even more important driver of global crude prices. Consequently, it is a clear positive for market balances that 2017 has seen an earlier than normal seasonal peak in refinery maintenance east of Suez. We expect refinery demand for crude to increase in the coming months.
Stubbornly high U.S. inventory levels have shaken market confidence that a deal by the Organization of the Petroleum Exporting Countries (OPEC), Russia and other top producers to cut 1.8 million barrels per day (bpd) from supply will end the two-year glut.
The US Western Texas Intermediate crude futures contracts for June delivery tacked on 20 cents, or around 0.42%, to end at $46.62 a barrel by close of trade Friday. It plunged almost more than 5% last week after hitting its lowest since November 14 at $43.76.
Trade Tips:
Initiate long the August2017/June2018 WTI spread. Renewing our long front to back trade in crude we seek to benefit from tighter market conditions in the coming months. The current contango market structure should narrow further as stocks draws accelerate in 2q’17 and 3q’17, thereby lifting July above December.
The OPEC meeting remains a risk to this view, but we hold a high conviction expectation of the cartel reaching an agreement. Acceleration in stock draws in the coming months should lift spot crude pricing.
Thus, add longs in the August2017/June2018 WTI spread at -$0.83/bbl.
Go long the August 2017 Brent future: We remain constructive on the prospects for markets to tighten and open an outright long position in August Brent futures. Thus, we encourage longs in the August 2017 Brent future at $52.24/bbl.
