This morning seems to greet a market that is holstering ambition in investment as political shenanigans in the United States coupled with uncertainty in economic growth in the likes of China keep markets guessing. Having accepted his nomination for President of the United States, he initially adopted an air of reconciliation in the longest acceptance speech in history which soon changed to the normally boorish style as he promised to end EV mandates on day one, get rid of the 'green scam', end wars with a phone call and stop the 'invasion' of immigrants. As for China, the third Plenum finished which was long on back-slapping ideals but short on details of any forthcoming stimulus. Evidence in an occluded future was highlighted by a senior member of policy research admitting that modernisation was complex, and the way forward would need an overcoming of varied difficulties and obstructions. 

As for oil prices, they too found themselves in a quandary towards the end of yesterday as the strength found from this week's US Crude stock draw came up against a macro suite blowing some of its froth off and a recovering US Dollar that had mid-week seen a decent fade due to the market's increased conviction of a FED rate cut in September. The nearby backwardation in WTI continues to urge bulls on with the strength in the US marker evidenced by how yesterday the M1 spread versus Brent traded as high as -$3.50/barrel before fading. Canadian Oil sands issues and seasonal demand are discussed below, but the nascent idea of third quarter demand permeates all. Brief interest was evoked from chat around the 'mini' OPEC+ and JMMC meeting in August, but sources known to Reuters suggest there will be little change in the groups attitude, particularly on the intention to pare some of the production cuts in place.

Time is the enemy for seasonality

The short term moves that oil prices are experiencing at present should not really come as much of a surprise. They are honour bound to adhere to the whimsy of the political world and boy, what a political world we live in. However, what has been the greatest driver of the love/hate, up/down nature of prices is the almost religious belief in third quarter demand driven largely by what will happen in a hot Northern Hemisphere summer and Gasoline season. When Hurricane Beryl did its worse by landing in Southern Texas, the market could be excused for thinking that products were to be the beneficiary of any upward pressure caused by the shuttering of the many-assorted oil infrastructure.

Yet, it has been Crude price levels that have given rise to the next bout of reasons to be cheerful as inventory continues to diminish. Stock levels fell by 4.8 million barrels this week, following a 3.4 million fall in the previous reading. Such draws are logical bearing in mind increased activity from the refining sector fearing storm damage, but US Crude production has hardly waivered from 13.3mbpd. Keeping North America in mind, that which is occurring in Canada also keeps Crude prices supported. According to reports from Bloomberg, 47 new fires can be added to those already troubling Alberta and the oil sands that produce some 400kbpd are now under threat. This has caused Canadian Crude grades to improve against WTI and the export market for both is now feeling pressure with reduced US international outflows of 400kbpd, accounting for the outperformance of WTI in arbitrage scenarios as seen in M1 WTI/Brent improving by $1.00/barrel in just two weeks, although it latterly fades. 

The Crude bull story is a compelling one bearing in mind the massive influence Midland now has on the North Sea basket, but if the summer is supposed to be made up of Crude demand driven by products, such notions are not backed up by what comes out of a refinery rather than what goes into it. Taking a look at refinery runs last week reveals an earnest charge from US processors to counter product issues that might be caused by weather damage. At 95.4% they had increased 1.9% and very much above the 4-week average. However, having shied away by 1.7% in this week’s Inventory Report to back from whence they came, there is a worrying signal that all is not what it should be in the third-quarter reasons to be bullish search.

Having been relatively flat, implied demand in Distillate did slightly improve, however, Gasoline’s measure fell away by 615k barrels. Where art thou, oh driving season? Customary thinking is that it will end with September, therefore, the window for products to inspire Crude prices is narrowing at a rapid rate. Cracks are of course malleable to one’s argument, and the high level being achieved by WTI will pressure them, but in general they are not faring well. The 3-2-1 crack spread, (2 barrels of Gasoline, 1 of Distillate, to every 3 of Crude), has tumbled $10/barrel this year with $4 of the slide in this month alone. Concentrating on Gasoline and using data provided by GasBuddy, the 18-month average retail price in the US has fallen from its April high this year of $3.70/gallon to $3.40 in June and has been tracking along at or around $3.50 since. This is hardly the stuff of Americans lining roads in desperation to fill their cars.

It is premature to completely dismiss seasonal adjustments to how product demand will develop. It will only take a few more ‘Beryls’ to blow their stuff across the sensitive part of production capabilities and quieten doubting inferences such as this. If Russia makes good on extending export bans on Gasoline during such a weather incident, the reaction will be violent. But the argument stills stands that the clock is ticking. The rally in Crude prices, particularly WTI have been somewhat third quarter self-fulfilling, although latterly nudged by weather incidents. What we question is the longevity of the opinion and in options parlance if one were long seasonal calls, one should be aware of time decay as maturity approaches.

Overnight Pricing

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