A smorgasbord of factors incentivised stock market participants to bank some profits after a more-than-decent run in recent weeks and months. These include a slowdown in manufacturing activity worldwide, signalling stuttering economic growth. The longest government shutdown in US history did little to maintain investor confidence, and private data gained relevance. It suggested a possible uptick in the jobless rate, while the Challenger report estimated that 153,000 US jobs were lost in October. Given the Fed’s dual mandate of ensuring price stability and full employment and considering that US consumer price growth of 3% remains well above target, the December rate cut, widely expected to follow the one agreed at the end of October, suddenly looks less certain now. Over the weekend, the donkeys and the elephants, nonetheless, made the first step toward reopening the government, helping the return of risk appetite.

Further concerns stemmed from the US Supreme Court, which heard the case on whether the widespread use of the International Emergency Economic Powers Act to impose import tariffs on the US’s trading partners is lawful. Finally, and perhaps most importantly, confidence in the seemingly perpetual rise of tech stocks was dented last week. There was no specific reason for the retreat; the remark from Nvidia’s CEO that China is winning the AI race may have been the spark, coupled with Meta’s bond issuance. The 3% weekly fall in the Nasdaq Composite Index was not exactly a sucker punch, after all, the US tech sector has gained 50% in value since April, and, at least for now, not much should be read into last week’s correction.

In oil, the decoupling between crude and products neatly encapsulates the key developments confronting the market. These diverging fortunes stem from an ever-increasing volume of crude oil stored at sea and the increasingly limited availability of Russian products. Tanker trackers estimate that more than 1 billion barrels of crude are currently afloat. Western sanctions continue to weigh on Russian exporters: Reuters reported last Friday that two vessels carrying 1.5 million barrels of Urals crude had to drop anchor offshore. Unsurprisingly, Saudi Arabia has reduced its December Official Selling Price for all grades destined for its biggest market, Asian refineries. Backwardation in the M1/M7 spreads for both WTI and Brent narrowed considerably last week.

The abundance of crude oil implies weaker refinery demand for the key feedstock; however, this has not yet been mirrored in product prices. Although the two major crude contracts ended the week roughly 2% lower, products rallied respectably: Heating Oil jumped 4.7%, RBOB nearly matched it with a rise of 4.25%, and the bellwether, ICE Gasoil, outperformed with a 5.88% return over the past five days. Effective Ukrainian attacks on Russian refineries, combined with the Western embargo, are having a tangible impact on Russian gasoil exports just as the winter season begins. The latest US sanctions on Rosneft and Lukoil have forced a Lukoil-owned Bulgarian refinery to temporarily halt diesel and jet fuel exports. Meanwhile, Gunvor’s withdrawal of its bid to acquire Lukoil’s foreign assets adds to concerns over product shortages when the latest punitive measures take effect on November 21.

Products were also supported by falling inventories, particularly middle distillates. US gasoline and distillate stocks declined last week, the former more sharply than the latter. Both categories show sizeable deficits compared with year-ago levels and long-term seasonal norms, which is particularly concerning for distillates ahead of winter. In the ARA hub, PJK International reported another weekly fall in gasoil stocks, which also remain below levels seen during the same period in 2024. Although middle distillate inventories rose in Singapore, the deficit to last year’s level remains price supportive.

The fundamental backdrop for crude oil and products is increasingly divergent, a contrast highlighted by the strength in crack spreads. The Heat/WTI spread at $44/bbl is almost twice as high as in November 2024, and the Gasoil/Brent crack at $38/bbl shows a similar doubling. It would be brave to bet against continued strength, however, especially if the northern hemisphere winter turns out colder than average.

Fundamentals are Reflected in Money Managers’ Views

The main gate of the Commodity Futures Trading Commission headquarters in Washington, D.C., has been closed for over six weeks, preventing us from forming a clear view of the thinking of US financial investors. Nevertheless, their positioning is likely not meaningfully different from that of Brent and Gasoil participants. Changes in net speculative length (NSL) in both contracts have closely mirrored the headlines that exert outsized influence on outright prices.

As a result, Brent NSL fell by 19 million barrels last week to 152 million. Notably, the decline was driven more by shorts adding to their gross exposure (up 13 million barrels) than by longs reducing theirs (down 6 million barrels). Although last week’s NSL is nearly three times higher than the historic low recorded three weeks ago, it remains well below the recent peak of 232 million in mid-September, while prices have declined by only about $5/bbl.

Gasoil is the reason the Brent flat price has remained relatively stable. NSL in this refined product increased by 700,000 tonnes week-on-week and by 4.1 million tonnes over the past two weeks, as worries over supply and export disruptions resurfaced. Gasoil NSL now stands at 56% of Brent’s, uncharacteristically high and a clear sign of the idiosyncratic resilience in the middle of the barrel. Although the price paths of crude and products, particularly Gasoil and Heating Oil, have recently diverged, crude prices should hold up reasonably well unless product strength falters and nudges them inexorably toward the precipice.
 

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