Once again, the world of finance revolves around the geographical diplomacy, if it may be called that, of Donald Trump. In our contemporary times we are forced, daily, to muddle through disingenuous politicians, no matter in which country one might abide, and sitting on the top of the tree of mistrust are Presidents Trump, Xi and Putin. Like some grotesque on a childhood Christmas tree of an elderly relative, this three-headed monster keeps all in its gaze confounded by what might be said next and if any of the words used eventually find action. This morning, a source of CNN revealed that an expected pre-meeting between the world leaders’ key foreign affairs aides this week had been tabled, at least for now. Without such, there will no face-to-face in Hungary and the status quo of the Kremlin playing for time will win out again. The reaction in oil prices, rightly, is to do nothing, because nothing is the only real solution to nothing. Our community is so tired of the what ifs of a peace deal and free flowing Russian oil and its alternative, secondary sanctions, which cut the Kremlin’s money supply garnered from oil exports. Digging into oil price confidence is how our market continues to be the litmus test for world trade. Sanctions, tariffs, port fees, reduced inflation, civil unrest and all the other woes that befall so-called free economies find expression in the greatest industrial commodity of all. One bonhomie aside from Trump that he “loves his relationship with President Xi” is enough for equity investors, and once again the rally in stock markets roars on, leaving our community as its pragmatic wake. This commonsensical attitude and geopolitical fatigue, will keep our creeping grind lower and those that trade from ‘long only’ attitudes looking elsewhere.

Is the Carry On?

The ultimate arbiter of crude prices is product demand. Where, how and who burns refined fuel oils will always be the greatest determiner of purely fundamental consideration when trying to foresee future prices. Which is why oil watchers, rightly, are besotted with refinery runs and yields. As the clocks are about to be set into winter mode in the Northern Hemisphere, so indeed, are refineries which have started to endure the bi-annual turnaround season. Dragging the calendar back to less than four weeks ago, the prices of futures in Heating Oil and Gasoil were indicative of tight period for the middle of the barrel, one in which the future of prices across the complex would be guarded from decline because distillate was starting the season from a low inventory point. However, even a culling of Russian diesel exports due to Ukrainian drone attacks on Russia’s oil processors and low stocks in the US, Europe and OECD have not been enough to stop the future prices of Heating Oil and Gasoil to join in with eroding oil prices. Last week’s EIA Oil Inventory Report showed refinery utilisation back to the previous turnaround period at the beginning of this year and not even the halving of Nigeria’s Dangote capability has come with much of a reaction. The market is saving up a real distillate problem here or it is one it believes is easily curable.

Crack values and refinery margin might very well increase, even from the elevated levels they currently run at, but there can be little doubt on how an abundance, and a long-term one at that, of global feedstock washed in by ships on the ocean’s waves is having a soporific effect on sentiment. Last week saw a concentration by analysts on the amount of oil which might be aboard ships at present, and for bulls, it makes for sober reading. In a Bloomberg opinion piece, such wealth of oil aboard the multitude of vessels plying global trade was assessed as being more than one billion barrels, according to Vortexa, being the biggest flotilla of oil on the water since 2020. The spat between Saudi and Russia during that period does have a little echo in which OPEC are now once again prepared to sacrifice price to the gathering of market share. Backing up how the cartel’s priorities have swung, and again using Vortexa data as seen in Energy Intelligence, exports from OPEC+ last month registered a twenty-nine-month high of 22mbpd with the point being hammered home using Kpler data outlining exports from the Persian Gulf up 1.1mbpd year-on-year to 15.8mbpd last month and US exports up 400kbp to 4.3mbpd in September to the highest since February 2024. The volume of oil on water is indicated to reach 1.23 billion barrels in October, with an astonishing assessment on how 110 million barrels started journeys without a prior destination being known. 

We here prescribe to the theory on how price creates demand, and the falling value in flat price will end up solving the low prices currently seen. However, it is doubtful that the bottom of such a ‘J’ curve is in sight. Particular attention now needs to be paid to the state of structure in WTI and Brent futures which again are beginning to indicate a state of soft levels in flat price for the foreseeable future. The current visitation into contango territory would have to morph into something more permanent and steeper for any sort of ‘storage trade’ to make financial sense. Yet, traders are no doubt contemplating an increase their exposure to tankage be it land-based or floating storage because wherever one reads, there are plentiful warning of a crude glut coming sometime soon. The ‘carry’ trade of buying nearby deliverable oil and tanking it until it a future date when prices are more expensive, does not run to an exact formula for all. An oil major will enjoy vastly superior advantage in terms of storage and shipping costs and probably more agreeable financing than say an independent trading company. Whether or not the oil vessels setting sale without a targeted port is evidence of increased floating storage is in the domain of posterity. So much in calculation of oil balances and the likes of SPR are delinquent in information that tracking whether oil is being stored will only be revealed in hindsight. Indeed, how on earth does one factor in sanctioned barrels into the thankless task of balance tracking?  Nonetheless, if flat price continues to falter, and contango becomes commonplace, our community will be handed another magnificent consideration to trip us all up. 

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