The slightly farcical diplomatic situation developing between the US and Ukraine only highlights how an aggravated President Zelensky will take much more convincing to agree to a peace deal. Any immediacy of an ending to the war is disappearing and so are oil trading positions driven by an idea of a Russian future without sanctions and able to deliver its energy across the globe unhindered. Minus an imminent return of Russian oil, and equivocal language surrounding tariffs, the oil space once again looks to fundamental drivers rather than emotional or perceived ones.

The US EIA Oil Inventory report again offered a build in Crude stocks, which can be explained away by refinery maintenance. Yet, with an elongated winter, a Distillate draw and an increase in product demand the refinery turnaround period is starting to leave a hole in product supply with utilization only running at 85%. Indeed, the 4-week average of Distillate supplied, the metric of demand, calculated by Reuters, rose to 4.3mbd which is the highest for 3 years. Even Gasoline, rightly unfancied at this time of year is beginning to draw inventory. The Polar Vortex is not done baring its teeth and with Natural Gas prices on a tear, oil once again gets a seasonality bid. M1 Henry Hub futures is taking out the year-to-date highs and printing at levels not seen for 2 years.

Given the problems of CPC oil deliveries after drone attacks, and the increasing likelihood of OPEC+ pushing back the planned return of oils from April, it is little wonder oil is starting to shake off political constraints and reset higher. There are plenty of reasons for the Brent price not to bust above $80/barrel, we remain sceptical toward rallies, but for now the suppressants of immediate global tariffs, that also drives the US Dollar lower, and Russian sanction lifting are abating and so is the appetite of bears.

Will US exceptionalism continue?

Markets will note with keen interest that in the FOMC minutes of January, Federal Reserve members alluded to a pause in the rundown of assets, which is tantamount to stimulus. Whether or not the central bank smells a downturn is unclear, but such a move is defensive. It would be a brave soul to call an end to the exceptionalism of US markets, but it is always worthy to question whether the accepted status quo of the investment backdrop remains.

With a cautionary lean in mind, it could be argued that an air of vulnerability remains after the recent tech ‘tip out’ over AI worries. The news on how DeepSeek’s laboratory boffins claimed that its new AI model, R1, outperformed Meta’s Llama and OpenAI’s 01 across various measures injected fear into US tech length which for so long has been running on the fuel of FOMO. Not only is the new AI ‘open-source’ (where the program and coding is available to users for free), it does not require the massive computing power needed by other AI applications, uses a lower standards of semiconductor/chip and therefore much cheaper to develop and run. What has shaken investors is up until now there was a presumption of a US tech industry miles ahead of any other nation. DeepSeek’s development takes a massive slice to such a supposition and from a sensitivity standpoint, is made worse by the slicing knife being a Chinese company.
The Hang Seng has enjoyed a derelict existence since the end of the pandemic. Scuppered by all manner of bannered and failed stimulus attempts from mainland China and a domestic market crushed under the weight of over investment in infrastructure and housing, the index has floundered while many of its peers soared. Recently, however, a renaissance has arrived and largely due to the news of DeepSeek. Since the middle of January tech stocks in Hong Kong have gained over 35% giving an impressive performance from the main index which has improved by around 25% year-to-date. An immediate switch from US tech to China tech from US investors is unlikely, given the precarious nature of the countries’ relationship. However, the ‘Terrific Ten’ of China’s tech names are proving a worthy consideration rather than the ‘Magnificent Seven’ in the US. According to Reuters, Goldman Sachs has upgraded its targets for Chinese Indices, and Bank of America said the view on China could be shifting to "investable" from "tradable".
Redirecting the focus to Europe, which has in contemporary times endured an even more desolate economic existence than China, there are some green shoots of recovery. While the FED remains in a defensive posture, its counterparts on this side of the ocean namely the European Central Bank, Bank of England and Swiss National bank along with Sweden’s Riksbank have all been about cutting interest rates for the sake of economic growth. There is a strange dynamic occurring in Germany’s DAX bourse. Much of its performance has always been due to the heavy investment the constituent companies of the index place into the US, but there’s a kicker going on for European share ownership and it emanates from the US. Europe was the biggest economic victim of the Ukraine invasion, with Germany taking the lead of sufferers. If by some miracle, Donald Trump pulls an end to the war out of his very busy magician’s hat, then it will likewise be Europe enjoying the vast benefits of peace.

France has at last secured a budget, and although its debt burden makes for worry, political instability is a greater foe. Its neighbour and most important economy’s outlook is improving. The ZEW Index of Expectation published on Tuesday saw a 2-year high and doubled what it was in Germany from December to January. With an election this Sunday, February 23, commentators are expecting a win for the conservative CDU/CSU meaning Friedrich Merz will become the next Chancellor. His campaign of a reduction in taxes and regulation is striking a chord among the electorate as there are echoes of Donald Trump as Mr. Merz is expected to be a Chancellor who ‘gets things done’. The US is also aiding and abetting sentiment in the old continent. The delay in imposing tariffs on Europe and neighbours, and a presumption that central banks would act very quickly to nullify some of their worst effects brings relief.
Thus far China has also avoided punitive US tariffs. Therefore, will the current improving nature of investment opportunity in China and Europe bring evacuation from the US and its growth stocks? Hardly. But there has been little alternative, and some elements are stacking up against remaining headlong in US markets alone. Valuations are being deemed as overcooked, especially in forward pricing. As the Morningstar succinctly explains, analysts use the discount rate to determine the value of a company’s future cash flows and are becoming uncomfortable. Higher interest rates result in a higher discount rate, meaning future earnings are worth less than earnings today. Expected growth must then be discounted in value. Over 60% of the world’s stock market capitalisation resides in the United States. To give some perspective, when the DeepSeek news hit in January, Nvidia gave away 17% of its value, some $600 billion. The total capitalisation of the London Stock Exchange is $3.2 trillion.

Repatriation of some monies into China and Europe is no great stretch of envisagement. What then will some investment equalization mean for oil prices? Nothing in the short-term. However, Europe and China have been great sources of bearish oil narrative. Inflows into stock markets, stabler political landscapes and easier interest rates mean domestic confidence can build, and by default demand. Green shoots can often turn into false dawns; China and Europe have offered many such occasions. But, tariffs, wars, their possible settlements and an overbought US market give investors every right to check their rear-view mirrors and maybe consider changing lanes.

Overnight Pricing