Oil Market Update

Thus far this morning crude oil prices are retracing part of Friday’s surge in response to China’s relatively weak 2018 economic rate of growth, with the market also perhaps beginning to realize that, as we have previously discussed, the volumetric impact of the OPEC+ accord had already been built into the balance, as we had assumed. With the prompt NYMEX crude oil contract trading with a low “5 handle”, this compares to our estimated pure fundamental value, i.e. with no fund influence, of around a roughly similar value, i.e. $53.00-$54.00 per barrel. By the beginning of February, however, due to the normal increase in U.S. crude oil days supply as refinery runs decline further and stocks seasonally increase, this “pure fundamental value” is expected to retrace back to around $50.00 per barrel before beginning a prolonged seasonal recovery through May. 

• To quantify, just by the end of March, following the early February weakness, our pure fundamental model output suggests the prompt NYMEX crude oil contract will be trading in the upper $50s per barrel. If funds decide that things are improving, they could add another “layer” to price that would allow the May NYMEX crude oil contract to reach $60.00 per barrel. Obviously, our model’s output looks absurdly bullish compared to the consensus, where Wall Street has continued to cut their price expectations for 2019. With respect, however, these are the same analysts who were looking at $80.00+ WTI for the fourth quarter of last year, when we were substantially more conservative, correctly anticipating that a year-over-year U.S. stock “overage” would emerge and increase into the first quarter of this year. 

• Before we can find out whether our first and second quarter price outlooks are reasonable, however, the market needs to “test itself” in response to the weekly U.S. data as we pass through the next couple weeks’ “digestion period” of stock builds. That is, if in fact they occur as usual, how will they be interpreted by the market? If we witness a larger-than-expected crude oil inventory build, will it be “absorbed” with little sustainable price impact following a knee-jerk reaction, or will traders and funds begin to worry that the OPEC+ deal was simply not enough? • As we have previously discussed and illustrated, history has shown, in general, that the market tends to “absorb” the build and the implied increase in days supply. Looking at an index of the mean of the market’s behavior over the previous five years, assuming the mean equals 1.00, the variation has ranged from a low of .98 in the middle of the month to 1.02 by the end of the month, relatively modest in nature. This year we expect a low of .97 and a high of 1.02, roughly similar to the historic variation. 

• The historical and our 2019 January estimated variation will be tested “with extreme prejudice” if our guesstimates for the week ending January 18 are anywhere close to the mark, with the EIA releasing the data on Thursday, delayed due to the long holiday weekend. We have assumed that, once again in line with normal January behavior, refinery crude oil runs declined by another 200-300 MB/D to average less than 17.0 MMB/D, with estimated domestic production averaging 11.9 MMB/D once again. Our trade models estimate that gross imports recovered modestly and exceeded 7.6 MMB/D, while gross exports retraced to a greater degree and averaged less than 2.4 MMB/D. 

• If our gross import recovery is close to the mark the four-week rolling average would still come in around 7.5-7.6 MMB/D, which makes sense from an historic seasonal standpoint. Likewise, our export retracement assumption would still allow the four-week rolling average to remain in the range of 2.4-2.5 MMB/D. Adding everything up would imply a stock build of 4.0-5.0 million barrels, which we assume would at least imply a knee-jerk reaction down. If so, however, then the history of January stock gain “absorption” would suggest any retracement should be temporary