OPEC cuts & US inventories: Signs of progress in trade talks appear to be offering some support to the oil market. This, however, is not the only driver behind the recent strength. If we look at the fundamentals, they are constructive, at least in the prompt market. ICE Brent time spreads continue to trade well in backwardation, suggesting a tightening in the physical market. Meanwhile the strength also reflects growing expectations that OPEC+ will agree to make deeper cuts, as well as extend the deal until mid-2020 at their meeting next week. It is important to point out that this expectation is also a key downside risk, if OPEC+ fail to act.
This week, OPEC’s Economic Commission Board is set to meet on Wednesday and Thursday, and they will likely make their recommendation on what OPEC should do in terms of production cuts over 2020. While the board can make a recommendation, there is no certainty that OPEC ministers will follow this advice when they meet the following week.
Looking at data releases today, the API is set to publish its weekly US inventory numbers, and expectations are that US crude oil inventories declined by 939Mbbls over the last week, according to a Bloomberg survey. Confirmation of a stock draw from the API today, and the EIA tomorrow could offer some immediate support to the market, with the last stock drawdown seen in mid-October.
Canadian oil: Canadian oil differentials have not had a good time in recent weeks, West Canada Select (WCS) differentials initially weakened following the suspension of the Keystone pipeline after the discovery of a leak. Now the ongoing rail strike in Canada is adding further pressure. The WCS discount to WTI has widened from US$16/bbl last Monday to US$19.25/bbl currently.