August 28, 2024
We assess the NYM WTI crude oil options market presently implies the risk of a sub $65 expiry in the Dec-24 contract (CLZ4, $73.12) is about 1 in 5. Our work puts that risk closer to 2 in 5. However, we agree the most likely expiry is higher than the current price level. Options prices today imply the probability of Z4 expiry between $65 and $80 is about 45%. Our work puts it slightly above 50%. Risk of an expiry above $100 in the balance of 2024 is less than 5%. Would almost certainly have to be event-driven to occur.
Today’s EIA oil data (Aug 23) confirm the U.S. crude balance continues to tighten. Domestic crude demand is solid. U.S. refinery utilization increased by 1 percentage point last week to 93.3%. U.S. crude stocks drew by 846 thousand barrels last week, with nearly 80 percent of the draw (668 thousand barrels) occurring at the NYM delivery point in Cushing, OK. Cushing stocks are now at 35% of capacity and falling, which is driving the backwardation in the NYM WTI futures curve (V4X4 is now at $1.13 and steepening). That spread typically surges when Cushing’s storage capacity utilization falls below 30%. This outcome has a good chance of happening in coming weeks before refinery runs ease seasonally into mid-October, but it is not required to sustain the backwardated NYM curve and the attractiveness of owning prompt risk.
On the export side, the data show U.S. crude plus product outflows to international destinations were about 820 thousand b/d below our estimate of trend, with the crude side accounting for all the result. EIA reports crude exports at 3.67 million b/d.
This below-trend flow reflects the softer Chinese oil demand data we’ve been tracking since late June. China’s crude oil imports were 10.0 million b/d in July, or about 1 million b/d below our trend assessment and 1.35 m/b lower than the month before. While the evidence does point to a real slowdown in Chinese end use of liquids in late summer, China’s crude imports had been above trend in four of the first six months of the year. So, we are not unduly alarmed as the previously acquired crude stocks are run through, albeit at lower rates of utilization. Looking at China’s July crude imports by origin, a sharp slump in imports from Russia stands out. They were 1.75 million b/d in July, according to our processing of NBS raw data. That’s the first print below 2.0 million b/d in a year. Inbound crude flows to China from Russia had exceeded 2.2 million b/d in four of the prior 7 months.
On the 0 to 30 scale for Commodity Condition Indices (CCIs), Brent and WTI are presently treading water at 9. Conditions are still generally soft for oil, notwithstanding the tradable backwardations in TI and Brent futures. At the same time, we are watching the storm wave forming in the Atlantic, which we expect probably will become the F storm (“Francine”) by next week.
The Trade in Oil: we continue to want to own the tightening M1-M2 timespread in the NYM forward curve. Long Oct-24, short Nov-24. More risk-friendly traders can own a nearby (either V4, X4, or Z4) without the short leg. The compression in the cracks leaves us more friendly to crudes than products at this juncture.
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