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Ahead of today’s EIA’s inventory check, let’s just glance through the demand/supply equation of crude oil.
Crude and product demand seems to be solid. Seasonal crude draws expected in coming weeks. US crude demand at/near winter peak, but product demand lukewarm. Watch margins.
4w average production to 01 Dec was about 9.71 Mb/d. Final Sept output +290 kb/d vs. Aug, due to recovery after Harvey. EIA Dec STEO: US crude supply growth +760 kb/d YoY in 4Q17 and +780 kb/d YoY in 2018.
On balance, we envisage that the cuts are maintained at current levels in June, but that prices will weaken in anticipation of uncertainty ahead of the meeting.
We assume that OPEC will agree in June or possibly in November to extend the cuts through to the end of 1q2019, much as the current agreement was originally designed to expire at the end of 1q2018.
Looking at the risk management by 42 US producers, in 2018, US producers appear better hedged same time this year compared to 2017 levels. In terms of pricing, there were more volumes hedged between $49- 52/bbl WTI.
We have kept our US liquids supply growth target modest for 2018 close to +950 kbd on the back of an oil price recovery. The risk of US oil returning significantly versus a slower growth is still very much a strong function of price which will very much depend on what OPEC-NOPEC do in 2018.
As we’ve been seeing the price band of WTI crude prices are oscillating between $41.79 ad $59 and could foresee the range likely to prolong in the near run, it is wise to avoid near-term hedging using futures of near month tenors and simultaneously, use dips to deploy long hedges using forward contracts, we advocate adding longs in mid-month futures with a view to arresting upside risks.
