Light weight

Published at 11:53 3 Jun 2019 by . Last edited 11:18 22 Aug 2019.

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With CTAs now firmly in the driver’s seat, the market has given up on flat price ever converging with spreads or differentials, which despite coming off the highs, remain strong. Even though prompt fundamentals are still robust, the weakness in flat price and deferred timespreads is being driven by worries about future growth and US production surprising to the upside.

Following last year’s experience, the market is not keen to pay up for the possibility of tighter future balances. This is especially true as, after a tight Q3 19, builds reappear in liquids balances in Q4 19 and through 2020, as our first cut show below. However, crude balances are still tight with small draws expected next year, driven by higher refinery runs due to IMO 2020 and even with rampant US and OPEC ex-Iran output. The liquids builds are due to surging NGLs output.

Given most in the market use liquids balances as proxy for global crude fundamentals (despite the growing divergence between the two due to the increasing lightness of US crude), the market is asking why it should bother going long for just three months when the future looks bleak. And in no way does the market want to bid up prices to signal to OPEC that it should reduce cuts.

Based on current prices, OPEC+ is likely to simply rollover the deal, preserving the 1.2 mb/d cut versus October 2018 agreed in December 2018. But unless we are in a recession, this will end up tightening crude fundamentals further. If demand concerns persist and no one is willing to buy into the bullish future narrative, the only way the market can balance is for timespreads to roll up into steep backwardation at the front to kill off prompt margins, much like how July Brent spreads traded. Ultimately for 2020 as well, demand uncertainties will shape the year.

Global liquids balance through 2020, mb/d Global crude balance through 2020, mb/d
Source: Energy Aspects Source: Energy Aspects

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