Gasoline Explodes (Literally); Oil Languishes On “No Deal”

Crude may be having a hard time finding its footing thanks to a decisively indecisive OPEC, but gasoline is on a tear thanks to another “incident” in Alabama.

Less than two months after a spill cut supplies to large swaths of the Southeast, an explosion just a mile down the road closed the Colonial pipeline, triggering a sharp spike in RBOB:

Here are some visuals from the blast which killed one worker and injured five more:

https://www.bloomberg.com/api/embed/iframe?id=a55a84ad-dcd2-4dfe-b40a-baa6cb9a7d4c

Bring on the price gouging.

Jumping back to crude, specs cut net longs by 4K contracts last week. That’s the second week in a row:

(Chart: Deutsche Bank)

OPEC’s inability to strike a deal is weighing heavily on the market…

…and besides, even if the cartel did decide to curtail production the whole thing is self defeating because just as soon as WTI breaks $50, US production comes back online pressuring prices anew.

For their part, Goldman sees prices in the low $40s and isn’t optimistic about the chances of a sustained rally:

The OPEC consultation in Vienna last weekend was only a technical meeting, but the lack of progress on implementing production quotas and the growing discord between OPEC producers suggests a declining probability of reaching a deal on November 30. A unilateral cut from GCC producers1. would be unacceptable to them and the lack of an agreement so far has pushed oil prices sharply lower, with weakening oil fundamentals warranting oil prices in the low US$40s/bbl in our view if OPEC is unable to deliver a convincing agreement. Even if the fear of such low prices leads OPEC to deliver an agreement on November 30, we reiterate our view that the odds of it succeeding are low (see Higher probability of a cut, still low odds of success, October 10, 2016 for details). Further, we believe that rising OPEC production in October, from both disrupted and GCC producers, and a faster ramp up of new non-OPEC projects into year-end have further reduced the odds that an OPEC agreement translates into a decent draw in inventories in 1H17. Net, both the probability of a cut being announced and the odds of it successfully reducing inventories have declined over the past week, in our view.

• OPEC roundup: (1) Saudi Arabia and its Gulf OPEC allies (Kuwait, UAE, Qatar) proposed last week to cut 4.0% from their peak output levels vs. a 1.4% seasonal decline between 3Q and 4Q-1Q over the past four years and our 2.0% decline forecast (given the preliminary October production increase, our forecast implies a 2.6% sequential cut in Nov-Mar). (2) Recent comments from Russia, Brazil, Kazakhstan suggest these countries are not yet willing to freeze output at current production levels. And (3) Iraq and Iran remain committed on being exempt from a production quota (with their production under-counted in their view in the secondary data used to measure compliance).

• At face value, these latest comments imply GCC output down 4% from September and the remaining OPEC members at our existing 2017 forecasts2. : Total 2017 OPEC production of 33.2 mb/d and a combined Russian and OPEC output of 44.4 mb/d (if frozen at estimate October output of 11.2 mb/d). This compares to our pre-Algeria announcement production forecasts of 33.8 mb/d and 45.2 mb/d, respectively.

• However, average October OPEC output is already up to 34.2 mb/d. As a result, a 4% cut from October output levels for the GCC producers and current Libya/Nigeria production (we estimate Nigeria production at 1.7 mb/d and Libya’s NOC puts production at 0.6 mb/d, 0.5 mb/d mom and 0.3 mb/d above our 2017 forecasts) would bring OPEC production to 33.6 mb/d. Given our base-case forecast for a rise in 2017 Russia production of 0.17 mb/d vs. October, this would bring combined OPEC and Russia production to 45.0 mb/d in 2017, just shy of our pre-Algiers forecasts.

• Finally, Libya/Nigeria/Iran/Iraq are targeting another 0.6 mb/d increase from current production3. Further, Russia is ramping up production faster than we had expected, with our Russia oil equity analyst forecasting output of 11.7 mb/d in 2017 vs. our base case of 11.4 mb/d. As a result, at a 4% cut from October production level for core 4 Gulf producers, the targeted production from the “disrupted 4” and at our analysts’ higher Russia forecast, aggregate OPEC and Russia would reach 45.9 mb/d, 0.7 mb/d above our 2017 base case.

For more on where OPEC stands, see the full rundown posted on Monday.