The smartest oil trader will become insolvent quickly if she is the only one who reads fresh developments and events correctly, whilst the rest of the market takes a contrary view and makes counterintuitive bets resulting in taking all her money. This is the feeling one might get after the recent weakness in oil prices notwithstanding the seemingly constructive factors that imply ever-growing tightness in the underlying oil balance. To begin with, the IEA made an unexpected upward revision in its oil demand forecast this month and concluded that the reliance on fossil fuel might last longer than originally anticipated. There is now a solid consensus that global oil inventories will deplete throughout the year as demand is at unprecedented levels and OPEC+ appears to stick with its self-imposed output constraints – at least until June.

There are unplanned export disruptions from Sudan and Venezuelan foreign shipments are also on the descent as US sanctions waivers expire. The Middle East crisis has not had any adverse effect on oil production, but Russia’s production/exports outlook has been getting progressively worse due to resolute Ukrainian drone strikes. The latest Reuters estimate puts the country’s offline refining capacity at 14%. Around 900,0000 bpd production of refined fuel has been knocked out. Goldman Sachs reckons that the attacks are bullish for diesel, mixed for crude oil and a 1-month outage of around 1 mbpd would support distillate margins by $1-$1.5/bbl. Its peer, JPMorgan, believes that Russia’s recent decision of cutting oil production by 500,000 bpd should send the price of Brent to $90/bbl next month, 95/bbl in May and close to $100/bbl by the end of 3Q.

The fundamental backdrop is unambiguously price supportive, yet what we have seen during the latest week is a significant drop in outright prices, more so in products than in crude oil. Front-month Heating Oil shed 7% of its value since March 18 whilst Brent retreated 1.5%. The greater fall in products precipitated a considerable erosion of crack spread values. The CME 3-2-1 crack has dropped $3/bbl and the Heat/WTI spread has weakened $6.60/bbl with the structures of the three main product contracts also weakening.

There could be several reasons behind this nonsensical move. As my esteemed colleague pointed out in yesterday’s note, financial supply might be on the rise as the end of the quarter coincides with the 4-day Easter weekend. One can also wonder whether Russia’s refinery problems stimulated some conditional reflexes and have provided irresistible temptations to sell margins forward. Financial players might also take the view that expectations of an imminent rate cut are misplaced and decided to flush out weak length, largely based on the strong dollar. Finally, global product inventories might be deemed adequate to weather any potential shortfall of supply from Russia. Since cash and futures prices ultimately react to the underlying physical oil balance and stock levels, it is the latter we take a thorough look at below.

When combining US (reported by the EIA), NW European (based on weekly data from PJK International) and Singapore (using estimates from Enterprise Singapore) stock levels it becomes evident that oil product stockpiles are on the lower end of the historical range, albeit not worryingly depleted. Starting with the US, both gasoline and distillate stocks are a tad above last year’s levels – the former by 2.4% and the latter by a mere 0.6%. They, however, show a deficit of 1% and 4% to the 5-year seasonal norm and have been doing so for weeks. Fuel oil inventories are also under the long-term average.

Over to Europe, to the ARA region, gasoline stockpiles have made an impressive recovery from the January low of 818,000 tons and have risen more than 50% in the space of 10 weeks. To a lesser extent the same trend is observed in gasoil inventories. What is noticeable is the downside gap of 14% and 16% to the levels during the corresponding week in 2023 and the shortfall to the 5-year averages. Fuel oil inventories, on the other hand, are ample. In Singapore light distillate stocks dropped 12% year-on-year, middle distillate inventories built 7% whilst fuel stocks are down 5%. All three are slightly below the 5-year average.

When putting all three products from all three regions into one basket a seemingly balanced picture emerges. Combined stocks broadly match last year’s levels, and the 5-year averages are only somewhat higher than current stockpiles. Given that Europe is the most affected region by Russia’s product issues, the relatively depressed level on gasoline and distillate stocks might turn into a growing concern. If scarce availability persists from the east the Old Continent might have to rely on US products, particularly gasoline as the summer approaches, although European refiners are the traditional source of US gasoline imports. There does not appear to be an immediate crunch in refined products supply, yet the longer Russian refinery woes drag on, let alone intensifies, the tighter the European product balance might get with all its trans-Atlantic knock-on effects.

Reluctant Products

If support should come from refined products, then not much ought to be read into yesterday’s semi-decent bounce off the day’s lows, especially in WTI and Brent. The 3 million bbls build in crude oil inventories was greeted with a perceptible sigh of relief as it was meaningfully below the API figure. The draw in distillate stocks was the other welcome element of the EIA stats but this is where the encouragement evaporates. Total commercial stocks were inflated by 5 million bbls partly because gasoline stockpiles grew by 1.3 million bbls. The surprise build is explained by the fall in proxy demand, which plunged to 8.7 mbpd. Add to that the alleged resumption of crude processing in Russia’s Ryazan oil refinery, as reported by Reuters, and the re-appearing contango on the expiring front Heating Oil spread together with the widespread narrowing of RBOB and Gasoil backwardation somewhat confirms the above view that for now the refinery outages are being dealt with.
 

Happy Easter Holidays to all of you. Please note that the next report will be published on Tuesday, April 02.
 

Overnight Pricing

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