From the CME:
WTI is heading for yet another weekly loss with this week's decline the largest weekly loss since the week of June 17th. The declines over the last month or so have been mainly driven by the growing surplus of crude oil in the US as a result of the ongoing robust supply situation coupled with a downturn in refinery utilization rates in the US during the fall maintenance season.
US domestic production is now at the highest level since 1989 approaching the 8 million barrel per day level. On the other hand total crude oil and refined products inventories are also at the highest level since June of this year. However, with refinery margins continuing to widen in the US I expect US refiners will ramp up run rates as quickly as possible as those refineries affected complete their maintenance programs.
Even on the international front Saudi Arabia is starting to lower its production on oversupply concerns. Bloomberg is reporting that Oil Movements is reporting that Saudi Arabia production has declined recently as overall OPEC production (excluding Angola and Ecuador) will slide by 0.5 million barrel per day to 23.8 million bpd in the four weeks to November 9th.
With global oil demand expected to continue to grow at a very slow pace the market is entering a period where the robust non-OPEC supply situation is going to put pressure on prices and thus pressure on OPEC (in particular Saudi Arabia) to adjust production lower going forward. The December OPEC meeting is going to be an important meeting for OPEC as well as for the market. It will tell the market if OPEC is ready to defend prices and slow down a potential larger decline in prices by cutting the official OPEC export level. I expect OPEC to announce a small cut to their official export level with Saudi Arabia taking the majority of the cut as they start to test the impact it will have on oil prices..
The pressure on OPEC will be even greater if progress continues in the next round of talks between Iran and the West as it would suggest that the West could start to ease the sanctions on Iran with Iranian production re-entering the marketplace. Iran seems to have confidence that they are making progress as a Reuters article recently indicated that Iran is already approaching many of its crude oil buyers to gauge their interest if the sanctions are lifted.
The Brent/WTI spread has been in a narrowing pattern for the last several days after hitting a short term peak around the $12/bbl level. The spread has narrowed by about $2.50/bbl over the last three trading session as some of the edge is coming off of the North Sea.
Today the union offered a three year no strike deal to the owner of the Grangemouth refinery in Scotland. Ineos just announced that both the refinery and the petrochemical plant are staying open after reaching a deal with the Union. This guarantees that the steam needed for production of Forties crude oil will continue to flow. Although in the not too distant future the Forties platform will not be dependent on steam flow from Grangemouth. This is mildly bearish for the Brent/WTI spread and a contributed to the current narrowing of the spread.
The Brent/WTI spread has widened to a short term unsustainable level as Cushing stocks should once again start to decline as the Keystone South pipeline begins line fill and starts operations. The takeaway capacity from Cushing is going to increase over the next several months and with refinery utilization rates also likely to increase in both PADD2 (already did this week in P2) and in the US Gulf demand for crude oil is going to increase alleviating some of the concerns over a potentially growing surplus of oil in the US in the short term....MORE
