It is hardly surprising that the markets find themselves in a somewhat state of hiatus this morning, influences are many and variable, come in both bullish and bearish guises and the gamut in between. All markets were awaiting to ponder on the FOMC minutes of this month’s meeting and frankly there were few surprises, although the tone suggests that there remains a hawkish lean for fear of a premature monetary ease that will become easily undone if inflation takes a turn for the worst, and with a united voice, all participants agreed in maintenance of policy.

There is little doubt that positioning has lightened ahead of US Thanksgiving and today sees earlier posting of data because of the holiday. Durable Goods, Jobless Claims, Michigan Sentiment all come in as job lot and are hurdles to risk, these are intertwined with the UK Autumn Statement and a Eurozone Consumer Confidence Flash. Stock markets have enjoyed a spate of positive days recently, mostly due to tech-stocks which is why the Nvidia outlook has held an overweight importance, but even with margins estimated in the fourth-quarter above expectation, the lower demand from China and new US export rules to it on technology act as a counter-weight and the recently soaring Nasdaq drifts away from the highs.

As for our market, the run-off of risk seen above frames a similar journey for price action as, by recent standards, the overnight range in oil is tight in price and light in volume. The APIs are mixed with a crude build, product draws and came in as follows; Crude +9.1mb (+1.2m call), Cushing +0.6mb (TankWatch call -0.111mb), Gasoline -1.8mb (-0.2m call) and Distillate -3.5mn (-0.8m call), loosely aligned with inventory is the early release of Baker Hughes rig count and this will be allied with the state of production.

Those that still harbour a bullish worry from the Middle East conflict may be soothed today by Israel’s cabinet agreeing to a 4-day ceasefire for a return of hostages from Hamas, but history here requires all to believe it when we see it. Lastly, we have the imminence and eminence of ‘Saudi Sunday’. The games are afoot and whether oil’s central banker cuts a swathe with announcements before the weekend or holds off and quietly wields the big stick is a guess. Saudi Arabia is a smooth operator, it boasts battalions of analysts and their like and would have already worked out that a rollover of cuts and voluntary cuts will send the market south, for the current level of supply clamp is not enough to persuade the market that it is ‘tight’, it will need a concerted effort, going it alone will allow the market to continue in thinking that other members of OPEC/OPEC+ are either cheating or stealing Saudi market space. Oil is in for some tense and headline reactive days.

 

Products are the real drivers of oil

As estimates that global transportation accounts for over 50% of oil demand, with a markedly higher reading in the United States of over 65%, the idea that the performance of refined products are the tail that wags the dog are profoundly wrong, they are the legs that drive the metaphorical dog forward. There has been so much press on how the almost self-harming voluntary cuts by Saudi along with its veiled partner Russia have been the prop for oil price strength, along with the latterly geopolitical influence of the Gaza/Israel conflict, that the fate of motor fuel derivatives and their relationship with crude prices are often relegated to something that is looked at when an absence of contemporary news drivers occurs. Yet, it was only few months ago the plight of distillate stocks which inspired higher crack values at the same time an echo of gasoline demand remained from the driving season, saw every hiss, burn and flare proved over as refiners struggled to keep pace with world distillate demand trying to cover itself for any potential winter shortfall in the run-up to the refinery turnaround season and beyond.

Without running over recent crack and margin values, European distillate stocks topped out with natural gas reserves and any idea that switching fuels would be a thing this winter dissipated. US refiners along with others in the world suddenly found that with a lack of showing from a Northern Hemisphere winter, red-hot runs were eating into the very margin that gleaned such handsome profits and subsequently oil refiners trimmed throughput, dragging crude back down from whence it came as the effect of products came full circle from positive to negative. Yes, the risk-off war premium cannot be ignored, neither can the ever-niggle from interest rates, but oil needs fundamental props to advancing prices and the most important are those of transportation fuels particularly at time that sees month-on-month data showing depleting industry and manufacturing.

China, the biggest hunter of margin value was seen to decrease runs in October of equivalent 15.05 from September’s 15.48 million barrels per day, which can be evidenced in how much more crude was put into storage during October caused by the decrease in refinery processing. Reuters research calculating data from imports, domestic production and throughput estimate that 560,000 barrels per day entered storage during October. China has the most modern refineries, many of which have been built with the petrochemical industry in mind, but with enviable strategic feedstock supplies and a seeming ability in processing malleability even these modern twists on crude distillation units (CDU) are hard pressed in terms of profitability.

In an intriguing study, BloombergNEF, argue that a continuation of investment into refineries as seen in China will be hard to justify going forward as high in consideration is a balancing act between the likelihood of profitable margin in the near term and lower oil demand in the long. Up and until 2025 the status quo will continue as capacity will increase from new units, but the back end of the decade will see this slow with the study suggesting that 4.9 million barrels per day processing will be added by 2030 but only 1.9 million coming after 2025, a value of $260 billion for the decade which is 50% less than the preceding two ten-year periods.

Through the prism of the green debate and pressures on ideological investing, it is easy to understand how monies will be hard-won for refinery expansion. Carbon capture, carbon pricing, decarbonisation, net-zero rolls off the tongue and every day our conscious is bombarded that only dinosaurs drive fuel propelled cars, with such social pressure adding to virtue signalling of alternative energy investment. If this reduction in financialization of oil processing outpaces the introduction of renewable, electric cars et cetera, then the world will experience some screamingly high refined fuel prices. The role of refiners and demand for transport fuels will be much more of a focus and influence for crude prices, so will their seasonality, storage and its economics surrounding them and of course the small matter of demand.
 

Overnight Pricing