No war, no peace

Published at 11:19 30 Sep 2019 by

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Despite widespread scepticism about Saudi Aramco’s official timelines for restoring full capacity by end-September, financial participants are not positioned on the long side. All media leaks about restoring output earlier than expected and capacity reaching 11.3 mb/d by 25 September come from eminently deniable ‘unnamed sources’. We have calculated that Saudi production is currently around 8.5 mb/d, with no spare capacity, and our sources corroborate this. According to news reports, some of the produced crude is being stored now to be processed later. If the Kingdom starts storing off-spec crude, the pace of draws will slow, muddying the picture further.

And given that autumn refinery works are in full swing, the market may not notice the ongoing tightening, barring another outage. However, instead of the usual large crude stockbuilds during refinery maintenance, we are likely to draw inventories in September (-2.8 mb) or minimise October builds (+0.2 mb), setting us up for an explosive late Q4 19 as refineries return.

Moreover, while some in the market may keep selling on rumours of an imminent US–Iran deal, there is little basis for this. Trump may not want war, but the US is not about to do a deal either, evident in the US Treasury slapping secondary sanctions last week on six Chinese firms including COSCO subsidiaries for transporting Iranian oil, which sent freight soaring. The US will not lift sanctions to facilitate negotiations, and the Iranians will not negotiate unless sanctions are lifted.

Given all the uncertainty and internal biases (due to Trump’s fickle nature and lost trust in Saudi Arabia due to events in 2018), crude is likely to remain in a $60–70 range unless there is a specific catalyst to break above or below, though fundamentals suggest a breakout higher is more likely.

Fig 1: Brent prices and daily trading range, $/b Fig 2: Singapore cracking margins vs Dubai, $/b
Source: Refinitiv, Energy Aspects Source: Energy Aspects

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