Market Reacts Favourably to Saudi Crude Cuts, But Record Shipments Elsewhere Herald Bearish Sentiment

Thursday January 12, 2017

Two people with knowledge of the matter told Bloomberg that Saudi Arabia has imposed 30 percent cuts on two Southeast Asian refiners as well as a 20 percent cut on a buyer in India, with overall term supplies to Asia for February declining between 3 and 10 percent.

By contrast, refinery officials in Japan, South Korea, and Taiwan told the news agency they received full supply for next month.

State-run Saudi Arabian Oil Co. has reportedly curbed supply to some Asian oil majors by about 18 percent for February, and January sales suggest that the Saudis may be playing favourites: that month, supply to parts of Southeast Asia and South Asia (including India) was reduced while buyers in North Asia were largely spared.

The market reaction to the cuts was Brent on Wednesday rising $1.39 to $55.03 and West Texas Intermediate settling up 1.43 to $52.25 per barrel – the most gains in over a month, prompting Jim Ritterbusch, president of Ritterbusch & Associates, to state in a note, "We expect some bullish OPEC rhetoric to ramp up in an attempt to neutralize the bearish vibes that have emanated from the recent production increases indicated out of Libya, Iran, Iraq, and Nigeria."

It's questionable whether rhetoric will vanquish the bearish vibe, especially in light of U.S. Energy Information Administration data released Wednesday showing that crude production rose notably last week, particularly in the lower 48 states, to 8.95 million barrels per day - the most since April of last year; U.S. crude inventories increased by 4.1 million barrels last week.

John Kilduff, founding partner at Again Capital, called the EIA data, "one the most uniformly bearish reports in some time."

But that's not the end of the troubling news: Reuters oil trade flows data shows that European and Chinese traders are shipping a record 22 million barrels of crude from the North Sea and Azerbaijan to Asia this month, effectively plugging supply gaps caused by the Organization of the Petroleum Exporting Countries (OPEC) output reductions.

Reuters warned that more oil is to come: two more Very Large Crude Carrier (VLCC) supertankers with 2 million barrels of Forties crude are due to arrive in North Asia next month, while three VLCCs are scheduled to arrive in Asia in March-April.

Earlier this week, worried that with speculators having built up such a large bullish bet on oil, "there are very few short positions left.

"That suggests two things, both of which are bearish for oil: there is not a lot of money left to go long, lowering the chances of further prices gains; and the potential for a correction in prices is very high at this point."