feeeedAs a kid, I remember being scared of the movie “The Fog” without even watching it. What had previously been a mildly annoying natural phenomenon transformed into the ideal hiding place for all sorts of monsters, undead and assorted unsavoury characters. At any moment a bloodthirsty horde of ghosts could storm out of the cloud and seek revenge for the sins of one of your long lost ancestors… pretty soon, even saunas felt unsafe! Of course, not knowing what lay out there, beyond the suffocating white shroud was the main issue, and like all of us, I grew up to realise that the lack of visibility was the enemy. The fact that some things were hidden was a bigger concern than what those things actually were. This lesson stood me in good stead when I started driving and again when I started working. Effectively, in finance, we can all be surprised by the sudden appearance of a fog bank, which can hide the surrounding terrain from us, and allow the likes of Janet Yellen or Mario Draghi to creepily move around us, and punish us for the not so long ago debts we have accumulated! Will they appear now? Will they strike later? How chilling!

In their defence, while we may be flailing about trying to predict what central bankers will do, they are also flailing about trying to figure out how the economy is truly faring, and whether we will react positively or negatively to their decisions. Think about it, between conflicting economic data in the US, pending elections in Greece and Spain, the migrant crisis and China looking like it wants to experiment with crash landings, you would need an Ultra High Definition crystal ball to determine the right decision, let alone how the markets will react.

If the Fed decides to do nothing, it may spur markets higher, but the uncertainty will remain, as will the nagging feeling that all is not well… which could eventually propel the markets lower because they would realise that a mere 25 basis points of interest rates would be enough to make Wall Street look like the next John Carpenter horror movie. The consensus at the moment is that rates will be left unchanged.

If however, the Fed were to raise rates, I am not sure it would be that catastrophic. It would signal confidence in the state of the US economy, banish the Ghost of uncertainty and lift part of The Fog. If I was calling the shots, never being one for the consensus, I would pick this alternative. The economy has issues, and we must learn to deal with them. Hiding behind another dose of Fed hesitation would only prolong the guessing game and damage long term prospects.

Meanwhile, the ECB though Wednesday would be a great day to remind everyone that it has many “levers” at its disposal to further ease the European monetary balance. This would of course further favour the dollar, and the timing may have been designed to deter the fed from hasty action. Come what may, we at Magma believe the market is acting like a panicked heroin addict who is not sure if his dealer is in jail or not. Intuitively, he also knows that he will eventually have to kick the habit before it kicks him. Come what may, this month or in December, rates will rise, and come what may, the ECB and the Chinese will continue to ease. Overall it will make for a stronger dollar a tougher US environment, and reduce worldwide oil demand, contributing to lower oil prices.

In spite of this bearish prognosis for demand, in spite of continuing excess supply, WTI rallied more than 4% after the EIA report was published. Granted a 2.1 million barrel stock decrease was published on the back of a large increase in refining. Yet, we also saw a 6 million barrel increase in gasoline and distillate stocks. Since oil products are still what you use in you cars and homes, we have to see this as another bull trap. The driving season is over, the hurricane season didn’t happen, and the only question on everyone’s lips is how big will maintenance season be.

So if we get into the details, crude stocks have decreased on the back of a 403,000 barrels a day increase in refining. Most of this occurred at the delivery point in Cushing Oklahoma which leads us to believe it is part of a last hurrah before the October WTI contract expires. Brent-WTI has narrowed to US$ 2.2 per barrel on November. With expiry looming large, we will refrain from getting involved, as it may converge to parity right on expiry. It would then be a great time to buy November which we think will widen as US stocks increase dramatically. We had no qualms in selling the Nov Dec WTI at US$ 0.6 contango, even though it has now narrowed to US$ 0.5. We still think once the October goes off the screen that spread will go into a wider contango. So in effect, in spite of the rally to US$ 47 on WTI, our view remains the same with some minor tweaking and we still think we will see US$ 32.20.

As we described above, distillate stocks saw a rather large 3.1 million barrels of increase in stocks. Demand is down a whopping 9.09% from last year, and that cannot be bullish in any way shape or form. Something is going on in the distillate market, and it bodes ill for winter. The margin has lost another US$ 2 before maintenance, and we must keep our cool and not chase it down. If October expires as I expect, Margin bears may find themselves in a trap of their own.

As the driving season has expired, gasoline stocks added a large 2.9 million barrels and demand is falling fast, even though it is still above last year. Here too the margin has come down US$ 1.5 but we feel it would be too risky to chase it down now. Wait for refineries to shut down, see if the margin recovers, and then sell it.

Refining jumped 403,000 barrels a day and returned into five-year high territory as participants seek to squeeze every dollar they can while margins are still decent. We are still all waiting to see what the maintenance season will look like, yet in view of this week’s jump, I am starting to believe it could be kept to a minimum, but it is too early to tell. Look to margins to improve anyway when it starts, if only temporarily on the back of weaker crude.

You will find below our usual graphs. These represent the evolution of stock levels for Crude oil, Gasoline and Distillates (heating oil, diesel and Jet fuel) as well as refinery crude runs. The graphs show the current year against the High/Low range of the preceding five years. These are published by the EIA on a weekly basis, and are used by traders the world over to try and assess Supply and demand. The scale is in thousands of barrels over the 52 weeks that make up the year.



US Commercial Crude Stocks… is the draw really bullish (Source: EIA)


US CRUDE RUNS (Refining)


US Refining… Squeezing every drop (Source: EIA)




Distillates Stocks… More! (Source: EIA)




Gasoline Stocks… And More! (Source: EIA)

Mohab Kamel

Magma Oil Sàrl.

E-Mail: mkamel



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