If any had forgotten the important part Russia plays in the puzzle that makes up the complicated supply lines in the oil market, it was surely brought back in focus last week. The issues surrounding how Russia is being impeded in bringing its oil products to water were singularly responsible in arresting the recent downward grind trajectory and saved prices from looking at the year-to-date lows. Yes, distillates have shown more than a heartbeat as we approach the winter season in which they will be keenly observed and positioned against, but they only held themselves rather than the complex as a whole, for the cracks were continuing to widen. Refined fuel exports are approaching their lowest loading since 2020 and according to Energy Aspects the cumulative damage being done to the refinery capacity of Russia could very well be approaching 1mbpd and as seen in the Financial Times, diesel shipments, if they maintain the current rate, will fall to the lowest monthly total in September since 2020, according to both OilX and Vortexa. It is an enormous financial blow, using data from the Centre for Research on Energy and Clear Air, the value of floating exports amounted to some $170m/day, or the equivalent of $5.3b for calendar August.  

There seemed an accepted narrative that Russia, having sustained what looks to be sustained refinery damage, will resort in making up income from oil sales by increase crude exports. Given that Ukraine have hit the crude loading facility at Primorsk and Novorossiysk, it does appear as if such optionality of an export substitute might not just be as straightforward. Various analysts have Russia's oil revenue contributing between 30 and 50 percent in the country’s budget for the last decade, therefore any demise in the largest component of income stream is doing likely irreparable damage to not only the Kremlin's budget but giving secondary troubles for financing the 'meat grinder' of a war playing out on its Western border. Ukraine’s Volodymyr Zelensky has often spoken on the soft underbelly of Russia being its oil industry and his countrymen have found a way to slash at it. Instead of waiting for sanctions or tariffs to materialise from either the USA or Europe, Ukraine is applying its own form of embargo. Washington and Brussels are compromised by an American president not willing to play war games with Moscow and the European contingent complicit in still being a customer to Russian oil. Indeed, it does beg the question on whether the decisive action taken by Kyiv has sponsored a more hawkish line from Mr Trump. The US President does have a liking for strong leaders, with something of admiration being expressed toward Vladimir Putin over recent history, but of late there are indications his stance has shifted. Ever an eye for business and economic wellbeing, the Donald’s deal making instincts are being offered a whiff of a struggling economy in Russia. International sanctions, rampant inflation, and high interest rates saw a comment from him last month observing how Russia’s economy “stinks”, tellingly backed up last week on his speculation on how Ukraine might be able to take back territory lost to the invasion of its Eastern lands. However, calling Russia a “paper tiger” in his dramatic rhetorical shift and urging the European Union and NATO countries who continue to lift Russian oil to cease such enabling practices before the US fully deploys further restrictions, is something also of a responsibility shift, all of which could easily be reversed.

Still, words are weapons in sentiment, which is why the futures complex, and even the out-of-season, out-of-favour gasoline contract, all made decent weekly gains. The M1 futures contracts finished; WTI +$3.04/barrel (4.85%), Brent $3.45/barrel (5.17%), Heating Oil +13.00c/gallon (5.65%), RBOB +6.69c/gallon (3.39%) and Gasoil +$39.50/tonne (5.7%). Positive enough, but the oil fraternity is rightly guarded and will remain so until more than just drone damage causes a cessation to the nefarious, but accepted practice of Russian crude being exported on the dark fleet to India, Turkey and China with the then end refined product being imported into Europe in an oil ‘laundering’. It is all rather unsavoury and so is the whole concept of the price cap but reality dictates practicality. The adoption of half-hearted policies against the aggression of Putin’s Kremlin is to pay homage to Russia’s historical and contemporary importance in oil supply, with any halt to its key role causing a price shock, which is why it will remain a sentiment changer and market driver in our market for the foreseeable future.

A busy docket, providing there is someone around to produce them

While we of an oily type are caught up in what could happen to Russian oil flows, we might not be able avoid the machinations of the larger macro considerations of the coming week. Today is the only day with a dull docket, but the rest of the week is jam-packed. There are many more than listed here, but the standouts for Tuesday are Japan’s Retail Sales and Chinese PMIs, US Consumer Confidence and Jolts Jobs data, Wednesday; European CPI and US ADP Employment Change, ISM Manufacturing PMI, Thursday; US Challenger Jobs, Jobless Claims and Factory Orders and Friday, the big one, the US Non-Farm Payrolls.

Yet where this all become very tricky, and given the importance of, as described above ‘the big one’, the US Non-Farm’s might not be published. If the US Government is forced to shut down as the usual drama-grab plays out between Republicans and Democrats over the budget, such data will be withheld. The trouble with this threatened standoff is it being the first opportunity for Democrats to take a meaningful bite after being swept aside last November. For them to agree to a budget deal there must be a reversal in the Medicaid cuts, restoring of funding to public media and extending subsidies for Affordable Care Act to name an obvious few. “Go ahead and shut it down” is a very likely response from the Republicans, and while blaming the opposition for playing merry with the payrolls of federal employees, will seize the opportunity to take a redundancy scythe to any parts of departments if has taken a disliking to and by doing so can brag to the electorate how it is getting on with ‘draining the swamp’. 

It is debatable and difficult to predict exactly the effect a shutdown will have on markets, most investors are used to a lot of hot air and last-minute deals. But these are recalcitrant times populated by recalcitrant fellows and an elongated government closure might just be another President’s precedent. What this all means for tariffs is also impossible to foresee; how and who will operate them and indeed, will the levies announced last week on trucks and pharmaceuticals be applied on Wednesday, the first day of shutdown? Anxiety is about to receive a premium which is why the greatest measure of all in stress, Gold, just ticked another all-time high above $3,800/ounce.

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