Renewed Ukrainian assaults on Russian oil installations and conducive macroeconomic backdrop helped oil prices continue their upward journey. A Ukrainian drone strike at a fuel tank in the port of Azov caused fire and although oil supply or export, as such has not been affected it has served as a reminder how effectively Ukraine exposes Russia’s Achilles Heel, its energy infrastructure. Doubtless, reports of the shutting down of the hydrocracking unit at the 400,000 bpd Pernis oil refinery in the Netherlands helped products rally, US economic data was equally responsible for maintaining the optimism in the oil market.

It appears that US consumers are feeling the pinch of high interest rates. This is what the latest retail figures insinuated from May. They grew by a disappointing 0.1% as opposed to the expected 0.3%. When coupled with recent data of loosening labour market conditions, US central bankers are increasingly of the view that monetary policy is restrictive enough to lower the cost of borrowing in the foreseeable future without re-igniting inflationary pressure.

Given the precariousness of US monetary policy of the past two year such an outcome is anything but unequivocal, nonetheless the current approach did nothing the dent the underlying buoyancy in oil, which originated from last week’s figures on global oil balance. The ruthless widening of crude oil backwardation is nothing short of impressive and now morale could be boosted further by drawdowns in US oil inventories, an unmistakable sign of healthy consumption. Whilst the EIA, due to today’s Juneteenth National Independence Day, will release its findings tomorrow the API published its figures last night and they warrant caution. Crude oil stockpiles unexpectedly rose by 2.2 million bbls with distillate inventories growing by 538,000 bbl. Although gasoline stocks drew down it is still fairly plausible that without palpable signs of declining US and OECD commercial stocks the current sanguine rally will remain susceptible to corrections.

Still Sluggish Refining Margins

It has been frequently discussed that the forecasts for the remainder of the current year prognosticate depletion in global oil inventories. The extent of it significantly varies but even with OPEC+ starting to roll back on its voluntary 2.2 mbpd production restraints from October stockpiles ought to start thinning as the second half of the year kicks off and gradually draw down throughout the end of 2024. These expectations are built on disciplined supply management from the producer alliance and healthy growth in global oil consumption. The brighter outlook is to be ostensibly embodied in rising refinery demand for crude oil and improving refining margin values.

There are implicit signs that refiners are getting ready for the summer season. Firstly, the backwardation on both WTI and Brent looks sturdy. In the last two weeks the M1/M7 WTI spread has risen from $1.72/bbl to $4.30/bbl by last night’s settlement, admittedly aided by the consistent replenishing of US strategic stocks, which could, by the way, produce a U-turn, if, as reported by the Financial Times, the administration decides to weaponize the SPR again to tame potentially galloping prices ahead of the elections. Brent backwardation has also widened with the same spread jumping from $1.58/bbl to $3.87/bbl. The physical European marker, which was priced significantly under the forward contracts at the beginning of the month is now fetching a premium.

The signs are encouraging but ultimately it is the end-user demand that counts. Elevated consumption from consumers and manufacturers is reflected in plunging product inventories and rising crack spreads. We will have the latest update on product inventories tomorrow when US/Singapore/ARA inventory figures are released but for now it is only fair to conclude that stocks are adequate. Latest available data suggests that the combined stock levels of light and middle distillates together with fuel oil stood at 467 million bbls in these three critical hubs, 18 million bbls higher than the corresponding week in 2023. Middle distillate/gasoil stocks seem particularly sufficient.
Refined product stockpiles have been at a comparatively comfortable level in the first half of the year, thus global refining margins have been facing considerable headwinds. As the updated table of the IEA’s Global Indicator Refining Margin demonstrates crack spread values, albeit ticked higher from April to May, are still depressed, especially in the US and Singapore. The USGC medium sour cracking margin, for example, at $17/bbl last month was $5/bbl cheaper than a year ago. Singapore light sweet crack spread was assessed at $1.76/bbl in May, down from $2.54/bbl during the same month of 2023 and the lowest since June 2021.

Judging by the performance of the CME 3-2-1 crack spread the outlook has not brightened meaningfully in June. The month-to-date average of $23.63/bbl compares with the May value of $25.92/bbl as both gasoline and distillate inventories register year-on-year surpluses. Gasoline displays specifically ominous signs as the weekly data from the EIA indicates below par demand for the motor fuel despite the ‘official’ summer driving season having begun in earnest.

The current snapshot presents an underwhelming picture but there are green shoots that indicate a more optimistic outlook. Gasoline deliveries from the 650,000 bpd Nigerian Dangote refinery, which became operational a few months ago has been delayed. Energy Intelligence pointed out that prompt Asian refinery demand should increase as turnarounds are coming to an end. They also cite vigorous US travel demand and conspicuous European refinery interest for spot sour barrels as potential signs of reversal. No doubt, the long-awaited upturn in global crack spreads has not materialized yet, current values are below historic standards. In the face of the present adversity oil prices are holding up remarkably well, front-month Brent is more than $8/bbl above the post-OPEC+ meeting trough. It shows genuine optimism that the global oil balance will eventually tighten. And when that happens, oil investors will feel emboldened to fire from all cylinders in the expectation of a move up to the $90/bbl area.

Overnight Pricing

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