OREANDA-NEWS. SGX Oil & Gas Monthly Report - July 2016

Oil

  • After a volatile June, oil headed more or less in one direction in July and that was down. Brent settled at $42.46/bbl and WTI settled at $41.60/bbl, losing more than 12% and 13% respectively since the start of July and reaching levels not seen in three months.
  • The mantra for most of the year had been ‘rebalancing’ – a scenario where the market has gradually worked off the supply glut aided and abetted by production outages and strong refinery runs. However, last week’s crude build in the US and the return of production in both Canada and Nigeria was a rude awakening that rebalancing is probably further away than the market thought. Additionally, gasoline – which the majority of respondents to the SGX survey at the end of last year predicted would drive the oil complex this year  – is now awash with stocks after an underwhelming driving season. On the paper side, some of the long positions amassed since the start of the year took profit and the net shorts are building.

LNG

  • After a tight and range-bound month in June, the benchmark FOB Singapore Sling index rallied more than 17% in July to finish the month at $5.692/mmBtu, the first time the index has been above $5.5/mmBtu since the second week of January. This sustained rally can be attributed to a number of global factors. On the demand side, Argentina’s Enarsa ran a prompt tender for up to eight cargoes and demand from China and India remained firm. On the supply side, Angola LNG has gone offline until September, Cheniere plans maintenance at Sabine Pass in September and Australia’s Gorgon is still struggling to restart.
  • Once again, the divergence in price and fundamentals between LNG and oil is starkly laid bare. Since the start of the year, oil has staged a steady rally whereas spot LNG has gone the other way, reaching record lows at the end of April before staging a modest recovery. Then in July, oil had its worst monthly decline of the year in the same month that LNG had its best. And now, Japan’s Fair Trade Commission is seriously investigating whether the destination restriction clauses in long-term contracts restrict fair competition. If found to be so, this could very quickly accelerate the re-negotiations which have only been alluded to so far. The resultant surge in resale or re-diverted cargoes means spot trading will grow exponentially, and the structure of the LNG market will change dramatically – new cargo routes, new portfolios, new price discovery and indices.