With supply threats in Iraq fading away and news of Libyan ports opening to crdue oil exports, near term weakness has emerged in the oil market.Barclays noted in its weekly report that prompt month crude prices were particularly weak as softness in the physical market pulled the August and September contracts into contango (far month contracts priced higher than near month contracts).

Refinery appetite for prompt cargoes remained lacklustre in Europe as well as Asia due to poor margins, which was evident in the markets for WAF and North Sea cargoes.

However, the contango in the front of the Brent curve may not persist and may moveinto backwardation as sumner progress, Barclays added.

Product stocks in the Atlantic and Pacific basins are already low on a days forward cover basis, and replenishing them to support seasonally higher demand will support higher throughput levels. While the return of some Libyan production capacity has soothed the markets, the situation remains fragile and the chances of a relapse remain high. Already, there have been statements from the rebels suggesting a mid-August deadline for the central government to deliver on its promises, which if not met could result in further disruptions.

Even if Libyan production can average 600 kb/d in 2H 14 (an optimistic assumption), the call on OPEC will still increase 700 kb/d in 2H 14, requiring Saudi production levels at >9.5 mb/d, while spare capacity is at dangerous lows. ISIS poses a heightened risk to the stability of Iraq's oil exports at a time when the market remains on a knife edge. The situation in Iraq requires close attention. Geopolitical tension across Bahrain, Saudi Arabia, Israel and Kuwait also raises the market risk premium that could widen the Brent-WTI spread.

The IEA, OPEC, and EIA released supply and demand outlooks for 2015 this week. On the supply side, the agencies are expecting Non-OPEC growth to continue, albeit at a slower pace than in 2014. Conversely, on the demand side, the agencies are expecting a jump in demand growth, which will increase the Call on OPEC.

This week’s EIA petroleum status report showed a 2.4 mb decline in total US crude oil stocks, highlighting the strength in refinery runs amidst stable imports and rising production. Driven by record crude oil inputs in PADD 3, total US refinery crude inputs reached 16.25 mb/d, the highest level since 2005. US crude stock declines were mainly the result of draws in PADD 3, which totaled 4.2 mb. Cushing stocks built by 450 kb but still remain 47% below the five-year average. Stocks at the mid-continent hub appear to be bottoming out around 20 mb but could fall further as the Seaway Twin, which connects Cushing OK to Freeport TX, begins to flow.
Source: Barclays