When looking back at the performance last week of the various constituents of the oil futures complex, it is difficult not to arrive at the conclusion that it was one of consolidation. Breaking the five main contracts down and using the front month, they finished the week with advances as follows. WTI +$0.71/barrel (0.85%), Brent +$2.21/barrel (2.53%), Heating Oil +0.63c/gallon (0.27%), RBOB +5.43c/gallon (2.00%) and Gasoil +$6.75/tonne (0.86%). The overperformance of Brent versus WTI can be explained away by each of their expiries. Even though it settled at $0.56/barrel the front spread achieved a high of $1.28/barrel backwardation, therefore M2, namely June WTI has been reticent in capturing the differential value. Similarly, as Brent expires tomorrow; last week saw an acceleration in M1/M2 (initially caused by WTI) value so much so that the futures butterfly M1/M2 v M2/M3 rallied from flat last Monday to +$0.45/barrel at close of business Friday. With the 1-week CFD roll improving by only 6c/barrel over the week, May Dated versus Front Line (DFL) by 8c/barrel and the dated Brent May/June roll by a similar 7c/barrel, the rally in the Brent futures spread is driven by positioning and liquidation around the expiry.

Heating Oil remains an anchor

Gasoline prices, made more attractive after the seasonal spec change and pushed on by Russian refinery issues due to drone attacks, is experiencing the usual pre-summer FOMO and has easily hitched its bandwagon to overperforming crude markets. However, where we find incredulity to the notions of product demand being any benefit to crude markets is the state of distillates. Heating oil as a rule of thumb is second to gasoline in the cut of a barrel of crude and as such demands some spotlight. Petroleum Intelligence Weekly draws attention to refiner margin. At the start of February, US refiners enjoyed $40/barrel which has halved at current values. The EIA sees 6% lower Heating Oil demand in the first quarter of this year due in part to a winter that was 5% warmer than 2023. PIW calculates that 6% lower demand equates to trimming of 30kbpd and added a 2.4% decline in road transported goods and the introduction of biofuels into the distillate pool as added pressure domestically. Internationally, Europe’s gasoil demand is being sated by US and Far East imports and China National Petroleum Corporation forecasts that diesel demand in the Asia giant will reduce by 2.8% this year which will allow more product to flow externally. There is no relief from natural gas either. On Friday, May Henry Hub Nat Gas futures at expiry fell to 1.614MMBtu and not far from the all-time futures low. Its structure is in contango which has seen a ‘roll down’ in 3-consecutive months with each expiry toward the stated low. With Gas inventories 37% above the 5-year seasonal average, Heating Oil is unable to contemplate any sort of energy demand-switch support. Both Heating Oil and Gasoil futures emulate such contango at nearby spreads, but it is nowhere deep enough to inspire the idea of a storage strategy buying. Heating Oil/Distillate stocks continue to build and demand to shrink and with the summer’s Jet Fuel need likely to be the only bastion of support, Heating Oil remains one of our major reasons for doubting any charge in Crude prices to much beyond recent highs.

Equity bulls defy the data

Confusion and confoundedness in a marketplace are not the remit of oil alone. The heaves and haws of equities last week frankly scupper normal thinking that the impressive run in US stock values might be heading for something of a corrective process. The recent hotter than expected US CPI was given added warmth on Thursday by the Q1 Core PCE Price Index coming in at 3.7% versus a 3.4% call. Not only that but Q1 GDP Growth Rate registered at 1.6%, very much lower than the 2.5% forecast. The double-whammy of higher inflation and lower growth also saw the CME FedWatch tool again push forward hopes for an interest rate cut and that double-whammy became a triple. Pricing has all but been dismissed any change for May (this week) and June; no change in July runs steady at 68.7% with little change in prices for September and November. Interestingly, pricing for no change at all for calendar 2024 has, in one month, increased from 0.6% to 20.2% with the latest reading increasing from 14.0% of last week. In such circumstances a ‘soft-landing’ must ‘surely’ not be viable and for at least a short period of time, stock markets acceded. After tumbling Thursday morning due to a massive downward lurch caused by an investor disliking of Meta’s proposed increased spending on AI products, the heavily tech industry dependent Nasdaq began a process of shrugging off the PCE and GDP quarterly data, welcomed an unchanged March PCE reading on Friday, all but revelled in Microsoft and Alphabet/Google’s results and in a 5-day period ended up 3.45% with the rally on Friday being the best since February. The S&P at COB Friday was up 2.26% over the same period and the DOW, which is more immune from technology ups and downs, a conservative 0.32%. The Federal Open Market Committee (FOMC) will meet over a two-day period this week and must wonder what it needs do to tame such fervent resilience and one can only believe that its predicted unchanged interest rate decision will have zero negative influence and only a full gamut of hawkish language can offer any barrier to these raging bulls.

This morning, this week

In an interview with Reuters on Sunday, a Hamas representative confirmed that a delegation would attend talks in Cairo today regarding a ceasefire. The details of the horse-trading do not sound particularly new but over the weekend President Biden had a conversation with Israel’s premier Netanyahu, and hope springs eternal in markets. An easing of the geopolitical concern adds another gear to rallying bourses and conversely haven trades such as Gold and the US Dollar backtrack. With little other fresh news, the possible cooling of the Gaza environment sees oil prices slip. China is also in the mix of concern. Year-to-date Industrial profits rose 4.3% versus the year before, but the figure shows how bad profits in March were because January-February saw a 10% profit increase and 2-year high. Last month profits were down 3.5% year-on-year with the blame laid squarely at China’s insistence on increased manufacturing which has led to overcapacity and not fully regarded the lack of international demand. Natural Gas continues to have a debilitating effect on oil prices, as touched upon above, and in fact the profits of the major oil companies, which named the fall in gas prices as an obstacle to income.

The expiries of Brent, Heating Oil and RBOB aside, oil will once again be captured by the mood and news of the wider macro suite this week. The outcome of the FOMC in terms of decision leaves little to the imagination, but the language and forward forecasts will be poured over by all market participants with magnifying glasses and each version of understanding will be greeted by implausible price movements across all investment vehicles. Yet there are so many other drivers to consider too and the most important will come at us thus. Today, EU Sentiment and German inflation will have bearing on any ECB rate decision. Tomorrow, China NBS and Caixin PMIs, EU Inflation, US CB Consumer Confidence and many nations GDPs. Wednesday, US ADP Employment, ISM Manufacturing PMI and of course the FOMC decision at 19.00BST. Thursday, final PMIs from Europe, US Jobless claims and Challenger Job Cuts. Lastly, Friday, Norges Bank decision, EU unemployment, US Non-Farm Payrolls and ISM Services PMI. Therefore, the macro suite news will run as an overweight influence this week and oil prices will not be able to escape its clutches. That is only of course with a status-quo deadlock in Gaza ceasefire talks.

Overnight Pricing

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