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OPEC raises Oil demand forecasts. Oil and Oil.WTI divergence grows

Summary:

  • OPEC has raised its global oil forecast for 2017 and 2018
  • August saw OPEC production fall by 79k per day
  • Oil price looking to recover Friday’s losses

The monthly OPEC report has offered some good news for oil bulls with an upward revision announced for both the current and following years oil demand. Better-than-expected demand from industrialized nations in the West and China has led OPEC’s research arm to raise its oil demand growth estimate for 2017 to 1.42m barrels per day (b/d) - an increase of 50,00 b/d. Next year the world demand growth is now forecast at 1.35m b/d - an increase of 70,000 from the previous report. 

The increase in demand is a clear positive for the oil price, but what about the supply side? OPEC implemented production cuts at the start of the year in an attempt to stabilise the oil price, but despite this - and a further extension to the cuts announced in May - oil benchmarks remain lower on the year. In August, OPEC’s total crude production fell by 79,000 b/d according to data from analysts and consultants, to average 32.8m b/d. 

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 Oil.WTI has recovered around half of the steep declines seen at the end of last week. Source: xStation

Oil.WTI is showing a small gain on the day, but the price remains lower than last week’s high with a wave of selling hitting the market on Friday afternoon. The recent rise represents a recouping of 50% of the declines but the price will remain under pressure until at least the 61.8% at 48.49 is recaptured. 

Oil.WTI is seen as the US benchmark for the price of crude whereas Brent Oil (Oil on xStation) is the European gauge. There’s been a growing divergence seen between these two benchmarks in recent weeks with Brent outperforming WTI. This can be highlighted by today’s price movements with Oil.WTI rising by only 0.19% whilst Oil has gained 0.67%. The spread between these two products is now approximately $6 having been as low as $2 just a month ago.

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 Oil.WTI and Oil have had a notable divergence in recent weeks with the former lagging the latter. Source: xStation

The fundamental reason for this divergence is the damage caused to refineries in the US as a result of both Hurricane Harvey and Irma. This has meant that less oil that could be sold as Oil.WTI is expected to be produced and therefore there is an increase of demand for Brent Oil. Going forward look out for news relating to refinery damage as if it isn’t as bad as feared then they could return to full capacity sooner than expected and this may see the two benchmarks converge. 

 

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