The concept of oil trading has changed so much in recent history, none more so in this day and age of continued political interference. Gone are the times when analysts lined up to offer crafted assessment of production and demand to come up with a hallowed concept of an ‘oil balance’ to be trusted. Such studies presumed veracity in data, in open borders and at least a modicum of global peace. Taking such random tenets, there could indeed be many more, and testing them against the current affairs of this world, one can only conclude that there is a great big ‘fail’ going on. Data is manipulated or agreements flagrantly flouted such as production limits within OPEC. It is only five years since the worldwide lockdown of Covid; there is another form of one coming in tariffs and restrictive trading practices. Lastly, there are two ongoing wars that are changing the geo-scape in real-time. Striving to achieve an ‘oil balance’ is a thankless and now sometimes frivolous task, with even major banks having to reassess constantly and publish egg-on-face adjustments. We take no glee in pointing out the failings of others, our wrestle with how much oil comes from the ground to how much oil finds destination is as likewise tortuous and sometimes wrong. Taking Venezuela as a small example, and notwithstanding its Iranian-led dark fleet exports to China; its subjection to tariff-on, tariff-off leaves its influence on global supply impossible to fully track. Therefore, with data being at best retrospective, and applying Venezuela’s case globally, the market reaction then comes down to human perception making the ‘oil balance’ a social construct.

Currently, the ‘construct’ has a bearish mien. The sponsor of which lies in a strange notional insistence that a ceasefire will suddenly breakout in the Ukraine, and Russian oil will once again fill the gunnels of ships that will be reclassed as legal tender and able to slop Urals, ESPO, Sokol and other refined products unhindered to the corners of the planet. If the war were not so serious it would make for a parody of Tolstoy’s tome ‘War and Peace’ and be fun to work out who would represent the Rostovs, the Bolkonskys et al and what could possibly be classed as beautifully phrased diplomatic language? The five families in the 19th century literary canon are linked by societal climbing and connections. Our current five families of the US, Russia, Ukraine, India and China look like a mafia sit down in comparison with the link being our interest, oil. President Trump announced last week that he would meet President Putin in Alaska this Friday, with the extraordinary spectacle of the very country whose land is about to carved up in some sort of post-World War I and II repetition, Ukraine, not even having representation. Where India and China have skin in the game is any failing of the talks could lead to secondary tariffs across the board on Russian oil. CBS News, citing sources familiar with the discussions, reports that the White House is trying to sway European leaders to accept an agreement that would include Russia taking the entire Donbas region in eastern Ukraine and keeping Crimea while giving up Kherson and Zaporizhzhia. What Kyiv thinks of its land being bartered in conjunction with the world’s oil puzzle was expressed by yesterday’s drone attack on an oil refinery in Russia’s Saratov region. Rosneft, which owns the plant, has not confirmed the Ukrainian claim, but according to Al Jazeera, and a warning to those that believe President Zelensky will just be a good chap and wave through a US/Russian deal; “Ukrainian drones are targeting deeper into Russian territory than in the past, where previous attacks have been focused on the line of contact in the south and the western parts of Russia.”

However, it does appear as if Ukraine is the only valid dissenter. Europe may sell as many munitions to its beleaguered buffer in the East as possible, but when dealing with Russia it has proven to be weak. The bloc has, since the invasion, made secure its own energy needs before addressing Russia and its now grandstanding is easily labelled ‘too little, too late’. President Putin loves the bloviation, it suits his military grind. As for the President of the United States, his antipathy toward Brussels and Strasbourg needs little highlighting. China’s accord with Russia includes vast energy imports, and while it cares not a jot on possible secondary sanctions, a ceasefire would be a preferable outcome for it would rather not upset the delicate negotiations that is achieving a mutual trade agreement standoff between Washington and Beijing. As for India, it arguably longs for a cessation in hostilities. In an excellent Wall Street Journal weekend piece, it points to decades of close economic, political and military relations between New Delhi and Moscow meaning Trump faces a challenge in persuading Indian Prime Minister Narendra Modi to drop a partnership that has survived great geopolitical turmoil. If the implementation of fifty percent tariffs were to go ahead it would cause immense damage to the Indian economy. Yet the WSJ goes on to point out how since the Cold War Russia and India have enjoyed close ties with Moscow not only supplying military hardware, and the finance to pay for the armaments, it has also shown a willingness to share advanced technology. It is not a relationship so easily undermined as seen by New Delhi’s failure to condemn the Ukraine invasion and abstention in UN condemnation and sanction votes.

Therefore, the market smells an Alaskan deal. The rhetorical question of why Putin and Trump would meet if a deal had not already been largely thrashed out is more than valid. We are all made aware by TV shows and politicos that the pinnacles of power rarely enter a room to thrash out a deal, they are done in the dark recesses of power and communication, and such meetings of the ‘big guns’ are often a rubber stamping. This then brings back perception, and an oil market future with a much looser ‘oil balance’. While not entirely responsible, this construct aided a negative finish to last week’s proceedings. WTI M1 futures settled -$3.45/barrel (-5.12%), Brent -$3.08/barrel (-4.42%), Heating Oil -2.06c/gallon (-0.90%), RBOB -3.25c/gallon (-1.53%) and Gasoil -$6.25/tonne (-0.92%).

An additional confluence of bearish drivers met, and its wash took out what was left of bullish overtures. Although the US EIA inventory for Crude fell by 3.03mb, the reduction can be explained away by the increased refinery runs over the week of 1.5%. The issue of Distillate will not go away, but it is starting to be muted by a no-show from the Gasoline season. Summer has a long way to go, and the hurricane season should never be discounted, but the proxy demand of Gasoline barrels delivered cannot break much above 9mb, the accepted minimum level indicating healthy use of the motor fuel. Making further interesting bearish reading was a Reuters report on US exports.  Using Kpler data, Crude outflows fell to 3.1mbpd, the lowest since October 2021 with exports to Asia falling to 862kbpd in July, again marking a significant low by being beneath the three-month average of 1.1mbpd and at levels not seen since January 2019. With exports to Europe trimmed and Canadian crude prices being supressed it looks as if the increased OPEC+ barrels are starting to turn up on the world stage offering better value. Whatever one’s perception of the ‘oil balance’ is at present, it is not an opinionated seat to be comfortable in. Geopolitical considerations preclude it. Trusting to an Alaskan breakthrough is foolhardy given the ability of the protagonists to about-face quicker than an Olympian gymnast, but there is a real wobble occurring here and that which would settle it is hard to point out.

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