From Global Risk Management

The Oil Market Quarterly Outlook Oct'17

The outlook in less than 60 seconds....

The global fundamental balance has been shifting. Increasing production in the U.S., Libya and Nigeria have partly offset the current oil production cut agreement between OPEC and a row of non-OPEC oil producers. On the other hand, global oil demand is increasing as OECD countries, China and India continue to see positive growth rates.

The geopolitical risk premium is up as both the Middle East and North Korea tensions loom. Venezuela faces severe economic difficulties which spill over to the oil production in the country.

All in all, we expect oil prices to increase over the coming period, dark horses being the potential ramping up of U.S. shale oil production - bearish for oil prices - and geopolitical tensions possibly affecting oil output - bullish for oil prices.

So over the coming quarter we could see highly volatile prices and Brent oil price within the range of $50-65 is not unlikely.

GOSI - Global Oil Strength Index

GOSI is the Global Oil Strength Index - an index created to evaluate important issues and the effect on oil prices. It answers the basic question: “Are oil prices going up or down from here?”
A high rating is bullish for oil prices and a low rating is bearish. In other words, the index is a lot of information boiled down to one number that indicates whether prices should go up or down.

From Global Risk Management

The Oil Market Annual Outlook Oct'17


Crude oil fundamentals

Crude oil supply last quarter hit quite a lot of speedbumps. The first and primary being the OPEC/non-OPEC production cut agreement, which has varied in terms of compliance rates. OPEC members agreed to cut 1.2 mio. barrels per day, non-OPEC oil producers would cut 0.6 mio. barrels per day. The agreement took effect from January and was extended to be in effect till end of Q1-2018. Below is an overview of OPEC and non-OPEC oil producers' compliance to the production cut deal.

Exempt from the OPEC / non-OPEC production cut deal are Nigeria and Libya. The two countries continue to experience supply disruptions and the supply has been unsteady, mainly due to internal conflicts and fighting, but both countries have managed to increase production. For the next quarter, Libya's oil production remains fragile.  Nigeria has agreed to cap production at 1.8 mio. barrels per day as soon as production at this level seems stable.

The EIA (Energy Information Administration) raised its U.S. crude production forecast for 2018. These figures come on top of an already increased forecast for 2017. Also, the number of Drilled but Uncompleted Wells (DUCs) continues to increase; in Q3 it rose from 6,616 to 7,048 (end of August), indicating a potential increase in U.S. production.

The question is if the incentive is there? U.S. production and exports rose to the highest this year. Most of the crude exports flows to Asia indicating an increased demand.

With Brent prices being the highest this year and WTI the highest since Q2, incentive to produce is likely there. But there is most likely a time lag attached to a price movement like this (see special feature), suggesting that increased production is likely to affect prices during Q4 possibly in the second half.

Market consensus about the long-term oil demand is that it is increasing. Growth figures remain positive among the 3 majors (U.S., China and India), which is the main driver of such estimates (elaborated in Financials section). Additionally, the IEA (International Energy Agency) raised its oil demand forecast of 2017 by 1.6 mbpd to 97.7 mbpd. OPEC increased the demand forecast for 2017 as well. The organisation expects demand in 2017 to reach 96.8 mbpd, which is an upward revision of 1.42 mbpd.

Brent price skyrocketed during last part of Q3 most likely indicating that oil demand actually did pick up heavily. Some of this increased demand likely comes from Asia, as indicated by 1/3 of all U.S. crude exports going there.

Likely this increased demand will persist during Q4 especially as we are entering the heating season, which is a season historically known for increased middle distillate demand.

Fundamentals summary

During Q4 the U.S. oil rig count is likely going to increase due to higher oil price levels. This should dampen the increase in Brent price. As the increased U.S. shale oil production seems imminent, OPEC will likely seek to extend the oil production cut deal at the meeting in November.

We set crude fundamentals to slightly bullish

Middle Distillates

Even before Hurricane Harvey, the middle distillates situation was tight in Europe. Earlier this year, Indian spec changes meant that ULSD had to be diverted from Europe to India as Indian refiners had to undergo upgrades to meet the Bharat IV standards requiring usage of lower Sulphur distillates. Strong OECD demand due to increasing world trade activity also meant that gasoil stocks were being drawn in Europe despite refinery runs already being increased to meet this demand.

The onset of hurricane Harvey meant U.S. Gulf Coast refineries going offline which stopped the arbitrage flow of middle distillates from U.S. to Europe and exacerbating the already tight situation. Strong Latin America demand due to ongoing refinery outages also meant more U.S. cargoes were being diverted to Latin America instead of across the Atlantic to Europe. As a result, gasoil inventories in Europe continued depleting despite higher refinery runs resulting in higher gasoil cracks and time spreads. The East West arbitrage also had to open for Asian gasoil to be shipped to Europe and the front EFS (Exchange of futures for swap) widened to beyond minus 26, the level needed for the arbitrage to happen.

Looking ahead to the next quarter, we do not expect the tightness in middle distillates to improve anytime soon. The hurricane effects have largely gone with gasoil cracks returning to ‘more normal’ levels but the gasoil time spreads remain elevated with demand continuing to be strong and stocks drawing despite higher refinery runs. In addition Russian diesel exports was lower in September due to refinery turnarounds. One factor that might have helped to alleviate the tightness is falling Saudi Arabia demand, but Middle Eastern ULSD has traditionally failed to meet European winter specifications.

We expect gasoil cracks and time spreads to remain elevated in the near term. However, the gasoil East West will likely retrace upwards after cargoes from Asia has been shipped to Europe albeit the long sailing time. China has also recently announced a cut in export quotas so any fears of a deluge of Chinese products in the Asian markets are curtailed.

Fuel Oil

Fuel Oil Rotterdam barges cracks have in the past week retraced from its highs this year with the October crack retracing from around minus 5.8 to approx. minus 7 currently. Cracks had jumped earlier this year due to a combination of 2 factors. Firstly, OPEC’s decision to cut output had disproportionately reduced the supply of heavy crude oil, causing the Brent-Dubai crude spread to tumble and reducing the supply of Fuel Oil refineries could produce. Secondly, hotter than usual summer weather in South Asia and the Middle East meant increased Fuel Oil usage for power generation. Because of these factors, Asian Fuel Oil versus Dubai cracks were in positive territory momentarily, implying that unprocessed crude oil could have been used in place of fuel oil!

That situation has now changed with cooling temperatures in the Middle East and South Asia leading to a reduction in fuel oil demand and cargoes being directed from the Gulf into Asia Pacific. Furthermore, Caribbean Fuel Oil is also finding its way to Asia as the hurricane situation has led to a decrease in demand. Finally, with crude futures prices being resurgent and Fuel Oil prices being stickier, Fuel Oil cracks are seeing a retracing from the highs of this year.

In the quarter ahead, we expect FO Cracks to continue weakening. The market for the cleaner products remain tight and refiners will increase runs and put off turnarounds resulting in more Fuel Oil supply. And while bunker oil demand has been strong in Asia, overall demand for Fuel Oil in the region has been decreasing in the previous months leading up to this. With our expectations that crude futures prices will continue to climb, Fuel Oil will be the laggard on a relative basis to crude and cleaner products.

From Global Risk Management

The Oil Market Quarterly Outlook Oct'17



Interest rates rose to 1.25% last quarter. Theoretically this would imply a strengthening of the dollar. However, when theory meets reality, the latter has a tendency of mocking the former. As in many other cases, this time reality went the complete opposite way, and the dollar depreciated. While it is impossible to prove causality, there is at least a correlation. We do not asses that the rate hike in Q2 has had much effect in financial markets…yet.

At the last meeting the U.S. central bank, FED, did not raise interest rates. Market expectations are currently for a rate at 2% during 2018. A strengthening dollar should thus be, theoretically, in the horizon. Should reality agree with theory, a strengthening dollar, would likely be less bullish for oil prices. Ceteris Paribus that is.

On the other hand U.S. macro figures suggest a healthy and improving economy (which is why the FED projections are for a rate hike in the first place), which in turn should mean increased demand for oil.

 All in all we assess the U.S. situation as slightly bullish for oil prices.


Nothing significant has happened on the Chinese economic front. The downgraded credit ratings do not seem to have had effect on Chinese oil consumption or production. What does look different is the macro-figures. GDP, Caixin PMI and regular PMI are all looking bullish compared to last quarter.

The Chinese financials and monetary circumstances will likely not have effect on the oil market during next quarter, unless some extraordinary event occurs. Chinese financials are assessed neutral bearing in mind that Chinese growth is still among the highest in the world.


During Q3 India has not experienced the expected positive effects of the demonetization program mentioned in our last report. The program has been assessed a failure and the economy (population) took longer than expected to settle after the event.

The quarterly GDP has grown less rapidly since late 2016. Looking at the smaller economic indicators we see that the Fuel Wholesale Price Index (WPI) has increased during Q3, as have CPI and Nikkei Market PMI. Thus, it would not be unreasonable to expect the GDP growth rate to stabilize.

The process of implementing the new monetary structure in India has not accomodated growth, but we are possibly starting to see the trend turning into a slightly more bullish scenario according to above-mentioned. However, it will likely take a while for the full effects to spill over to the oil market. It is less likely that we will see a significantly increased oil demand in India in Q4.

Financials summary

As there has been no major news accomodating structural changes, we are left with U.S. growth appearing slightly more bullish and India's growth not looking to slow any further.

We set financials to neutral

From Global Risk Management

The Oil Market Annual Outlook Octr'17


Kurdistan, Iraq and Turkey

Kurdistan, an autonomous region in Northern Iraq, voted in a referendum on independence on 25th September 2017 – the result was ‘Yes’ taking 92.73% of the vote. The Kurdish region produces about 600,000 barrels per day (bpd) of oil or about 15% of Iraq’s total oil production. Its oil reserves amount to one third of Iraq’s total reserves. Most of Kurdistan’s oil production gets transported by pipelines that run through Turkey to the port of Ceyhan for export to international markets. Turkey is also a main buyer of Kurdish oil and gas, and is also a major trading partner of the country.

Some complications arose immediately post vote. Firstly, the central government of Iraq issued a statement telling the international oil and gas community to stop dealing with the Kurdish Autonomous Region and instead to only deal with Baghdad. Similarly, Turkey also stated that it would only deal with the Iraqi central government and it would close its Khabur crossing, on the border it shares with Kurdistan. Possibly even shutting down oil pipeline flows and hence Kurdish oil exports. If this is truly the case, it would mean that global oil supply would fall by about 550,000 bpd. This implies a bullish boost to oil prices since the global oil surplus is approaching normal levels due to the rebalancing of the markets. Case in point, oil prices rose to 27 month highs on the day that the statements were released


During the early part of August 2017, Venezuela’s 545 member assembly unanimously voted for and elected a new legislative super body that is expected to rewrite the constitution and give vast powers to the ruling Socialist Party. Fast forward to today, the US has placed economic sanctions on president Chavez, frozen his personal assets and also prohibited dealings in new debt or equity issued by state owned oil firm PDVSA or the government.

Venezuela responded to this by suspending trading in US dollars and publishing the Venezuelan oil basket price in Chinese Yuan. Instead of sidestepping the sanctions, financial analysts say that this would further complicate the economic situation of the country due to increased foreign exchange and transactional costs. In addition, bond repayments totalling USD 3.5 billion are due in October and November 2017 – finding hard cash for this could prove a challenge. As such, a default cannot be ruled out. Adding to the country’s woes, oil production is expected to fall going forward due to severe shortages of diluents and also significant production losses – this affects the ability of the government to find the hard cash it needs, leading to a "catch 22" situation.

Geopolitical dark horse is the current crisis between North Korea and the U.S. as a large portion of the global seaborne crude could be disrupted should tensions escalate.

We set Geopolitics to Bullish

From Global Risk Management

The Oil Market Quarterly Outlook Oct'17

Oil Price Forecast

About the report and the authors

How is the report structured?

The report is divided into three parts – each part elaborates on three main topics which are influencing the oil prices:

  • Fundamentals – covering the supply and demand balance
  • Financials – covering speculators’ interest and the development of the financial market
  • Geopolitics – covering the situation in unstable oil producing regions of the world.

 The GOSI is the background for the medium term forecast on oil prices. The last pages in the report are our forecast and company news.


About Global Risk Management:

Global Risk Management is a leading provider of customised hedging solutions for the management of price risk on fuel expenses. Combining in-depth knowledge of the oil market, finance and transport, we help clients protect their margins from the risk posed by notoriously volatile fuel prices.

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Oil prices and

the number of active U.S. oil rigs

Special feature article


Over the past 10 years, U.S. oil production has increased from 5 mio. barrels per day to currently just above 9 mio. barrels per day, making the U.S. one of the largest oil producers in the world. Any changes in the production is therefore followed closely and in the below we highlight one of the indicators of production changes, the oil rig count.

Since mid'14 oil prices have plummeted, and so has the number of active oil rigs in the U.S. However, the U.S. shale oil production has increased. The explanation is new technology and techniques of drililng in the shale oil basins. Producers are able to pump more oil per rig and at a lower cost than before. This short feature article shows the development graphically and provides an insight into the dynamics between price and number of active oil rigs.

In order to quantify the development in the U.S. shale oil market we have conducted an analysis attempting to highlight the time lag from an oil price change to an oil rig count change and the change of structure of the break-even points.

First, looking at the total U.S. on-shore oil rig count and the price of Brent crude, it appears that following a price change there is a change in the number of active oil rigs; see graph below. In the period from 2011 up until late 2016/early 2017 the picture is in general that when the oil price decreases, the oil rig count will decrease within a certain amount of time. It is this amount of time this analysis attempts to establish.

The same result appears when using regression analysis. By regressing the oil rig count on a lagged value of Brent price we find that the most significant (the lagged parameter with the highest t-value) lag is 14 weeks (3.5 months).

At the point where the price curve "fits" best, there is about 4 months' difference in time, give or take a week

When reaching 2017, the above seems to change; even though the oil price drops or remains constant, the oil rig count continues to increase. This change leads to the next diagram where the number of oil rigs is plottet againsy the oil price recorded at the same time. But the plots are not ordered in time, enabling us to look at the structure of how many rigs were active at which oil price.

Looking at the Permian basin there is clearly a link between oil price and oil rigs; the higher the price, the more rigs, which is displayed by the green dotted line.  An interesting finding is that the black drawn line showing a different trend than the green line. This is called a structural break. What it represents is that there are more rigs at the same price level than earlier.

So what is the reason for this?

Most likely it comes as a consequence of lower break-even prices. I.e. that for the same amount of money, more rigs can be active. The only clear sign we have found is in the Permian basin, which is the most productive in the U.S. If this trend can apply to other production sites, we could see an even larger increase in the number of active oil rigs in future.

Below an overview of U.S. oil basins by size over time.

What is the conclusion?

When the price drops significantly we can expect the number of oil rigs to drop about 4 months later.