The lurch in positioning from max-bearish to max-bullish in the span of just a few weeks has once again taken a toll on oil prices, even though time spreads have held up remarkably well. The market is terrified of a repeat of H1 17 despite fundamentals being far more compelling today.
Fears around the sustainability of Brent backwardation persist, especially as Dated weakened considerably last week. But the rise in futures never matched the strength in Dated (partly driven by the usual North Sea trading games) and so futures have held up well. Hefty US crude exports, a switch to Urals—which rose sharply last week—and a lack of Chinese buying of Dated-linked barrels all mean plenty of oil pointing to Europe but the market has likely priced this in already.
The lack of Chinese buying is due to the majors destocking significant volumes of crude domestically and the Party Congress starting on 18 October that has put most decisions on hold for now, preventing Chinese teapots from their usual buying ahead of licences being awarded in January. We expect teapot buying to emerge by early November. Moreover, while limited product export quotas will cap the rise in runs, throughputs will still grow sequentially. Even with lower SPR fills expected next year (120 mb), China’s net crude short rises y/y by 0.2 mb/d to 8.35 mb/d.
So, even though incremental Chinese teapot crude purchases will slow next year, we see the current lull in buying as temporary. We have absorbed 50-80 mb of crude stocks over the last two months with ease, alongside hefty draws in products as well. The global liquids overhang is no more than 150 mb. While steep backwardation cannot be expected unless tanks empty entirely (a 2018 story), to expect Brent and Dubai to move back into contango would also be a mistake.
|Fig 1: Combined WTI + Brent net longs, K lots||Chinese refinery runs and forecasts, mb/d|
|Source: CFTC, ICE, Energy Aspects||Source: China Customs, Energy Aspects|