Again, oil cannot escape the downcast clutches of the wider macro suite and while being at such elevated levels with both the crude futures contracts of WTI and Brent registering as ‘overbought’, the pressure ensuing from another poor day for the bourses inevitably found its way into oil’s realm. European markets concerned with the state of inflation in Germany were initially irritated by the stubborn reading of 4.5%, but the main catalyst for unease came from a triumvirate in the United States. In a continuance of good news equals bad market action, GDP held steady at 2.1% and both initial and continuing jobless claims were lower than expected. Given the ‘higher for longer’ mantra in markets concerning interest rates, such decent macro-economic markers served only in reinforcement. The third pressure point from the US, and difficult to quantify other than a knock to confidence, is the almost done deed on a government shutdown.

Today’s first footing sees light trade across the investment spectrum although APAC’s bourses have mounted a relief rally, due in part to bond yields giving back some ground. However, markets brace for unpredictable movements caused by both month and quarter end position flows. On top of this, there is a Brent expiry to overcome and even more importantly this morning is the Euro Zone Core inflation flash expected at 4.8% and this afternoon is the US Core PCE Index (expected 3.9%) which is the Fed’s favoured inflationary standard. 

The markets feeds on data, it needs facts to verify theory and opinion. The flow of data is about to be interrupted in both the largest economies of the planet. Firstly, there is the Golden Week in China. The Mid-Autumn Festival starts today and will continue until October 6. Industry will be at standstill but more people will travel, with government offices and collators of data such as customs running on skeleton staff, extracting how the national holiday will affect the likes of oil demand will be hard to fathom particularly from a nation showing signs of belligerence in sharing trade data to the world. Secondly, if the government shutdown goes ahead in the US, then departments that produce data will also be closed and there might be a period of information blindness. Indeed, Thomas Barkin, a non-voting member of the Federal Reserve said (paraphrased) yesterday that a government shutdown would create uncertainty due to the lack of data and will complicate any understanding of the economy.
 

Cushing, not as easy a fix as history suggests  

The last time Cushing operational levels reached sub-20 million barrels was in 2014. On June 20, 2014, M1 WTI at 107.73 was both the June and year high. The day before on June 19, 2014, M1 Brent made its own yearly high of 115.71. Allowing for the vagaries of expiry, the M1 WTI/Brent arbitrage spread was around -$7.50/barrel when taking the Brent high for June 20 into account. After these almost ‘spike’ highs, both futures contracts proceeded in decline for the balance of the year. On the last trading day of 2014, December 31, both crudes achieved yearly lows of 52.44 for WTI and Brent 55.81 with the arbitrage value being loosely around $3.50/barrel. Incidentally, both crudes were above readings of 70 on their 14-day Relative Strength Indices when at the June 2014 highs.   

It is rather obvious where this is going, but the similarities are too tempting for a comparison not to be drawn. Alignment comes from the recent ‘spiking’ of prices (numerically, rather than anything untoward), probably soon-to-be matching liquid levels at Cushing, overbought signals and of course the idea that there will be greater amounts of crude available during the refiner turnaround season. Someone’s market happenstance is someone else’s market trigger, so can any of us be comfortable in taking up these quite similar circumstances and shouting from the rafters that crudes ought to be sold while they have a ‘9’ at the front of their numbers? Tempting, but probably no. In 2014 stocks were able to rebuild rather quickly as the competition for US crude was much more limited due to the 40-year moratorium on exports being still in place. Between 1975 and 2015 the Energy Policy and Conservation Act banned nigh on all exports of US crude oil. On repeal, crude oil exports rose from 13.355 million barrels in June 2015 to 114.618 million in June 2023, according to US EIA data.   

There really are quite a few differences in the state of the US crude markets and their relationship with the rest of the world’s oil machinations. None more so than the introduction of the US Midland grade into the North Sea Platts assessment. With the Saudi/Russian axis of oil supply-side management the fate of Midland and indeed all US production has become even more important as the US continues in the mantle of swing producer. What happens next is a guessing game, will the US continue to fulfil international crude oil needs, or will it sacrifice exports to build stock domestically? What will happen to refinery margins? At present cracks are suffering, recently the Heating Oil/WTI futures crack gave away $10/barrel in value, margin has suffered in similar vein globally, but it really is due to the rally in crudes caused by the concept of a ‘dry’ Cushing. This leads to a further mental juggle that more expensive crude during a turnaround season might just give refiners cause to reduce runs. That in itself is problematic, for if the demand for distillate materialises during the Northern Hemisphere winter as so many predict, refiners will then be back with an even greater thirst for feedstock. US crude is now so fully intertwined with global oil flows that the fate of Cushing stock levels and whether they rebound or stay low will have far reaching implications for the world’s oil prices.

Overnight Pricing