We live in strange times and experience strange moves from markets. Yesterday the US Inventory report from the EIA were highlighted by builds. They registered in million barrels; Crude +1.371 versus a -0.239 call, Gasoline +0.156 versus a -0.897 call, Cushing +0.213 versus previous -0.758, Refinery utilisation was -0.5% versus a +0.4% call, Crude production was steady at 13.2 with the only significant draw in Distillate of -1.686 which was almost exactly on call. Admittedly, and in isolation, the data is rather benign but they were so glaringly worse than the Earlier in the week the US came to the rescue of the dreadful picture posed by global PMI data. Just to confirm that this is a one horse race in the 2023 economic Gold Cup, yesterday’s expected forecasts for data were soundly beat. The September Durable Goods orders in the US came in at an astonishing increase of 4.7% against a forecast of 1.7% and if that was not good enough, the Advanced GDP quarter-on-quarter registered a 4.9% reading against a 4.3% call. The path of market behaviour when confronted with such news played out with the good news, bad news reaction and the usual risk-off wave hit the investment suite. With only a small rise in US jobless claims, indicating a stubbornly strong job-space, markets rightly conclude that the FOMC decision next week and ensuing press conference, is unlikely to offer a new mantra that supplants ‘higher for longer’.

This can be evidenced on this side of the pond where a hamstrung European Central Bank unsurprisingly kept its main rate at 4.5%, but its President, Christine Lagarde did little to assuage the economic woe sweeping the old world offering that ‘the economy is likely to remain weak for the rest of the year, [but] now is not the time for forward guidance’, basically confirming that current rates are here to stay. With the FOMC meeting next week in mind, markets will be awaiting the Core Personal Consumption Expenditure Price Index (PCE) which measures domestic prices US citizens pay for goods other than foodstuffs or oil, gas and energy and is the favoured measure of inflation used by the Federal Reserve. Judging by the Durable Goods and GDP data which is likely to be reflected in PCE, there will be little to offer any glimmer that the FED’s quantitative tightening is about to end soon.

China’s Industrial Profits overnight at last registered something of a hiatus in their failings, being only 9% lower year-on-year rather than last month’s 11.7% decline, but it is hardly the stuff of the US and is likely sponsored by the recently applied stimulus. In the 19th Century the Ottoman Empire was described as the ‘sick man of Europe’, but at present and according to this week’s data and Christine Lagarde’s greyness of outlook, Europe is a sick man. Global manufacturing and industrial output continues to disappoint and there seems quite a way to the finishing line of high interest rates. It remains to be seen whether energy markets as a whole can keep on ignoring these millstones around the neck of economic growth because they will continue to haunt the consciousness of the oil suite for some time.

 

Part III

Furthering the call to be of a cautionary mind is how the market, which is supposed to a be product driven one appears to be losing value in margin as is registered by the recent movements in futures cracks. M1 CME Heating Oil/WTI crack was $57/barrel in the middle of September, at COB last night it was printing below $40. It is way too premature to call the distillate season over, the coldest of weather is some way off and so are the twists and turns of demand and freezing infrastructure. Still, US refiners ought to be punching out fuels as quickly as possible but the EIA data from yesterday would tell a different story. Refinery runs fell by 207,000 barrels and utilisation was down by 0.5% being at 85.6% of capacity. Bringing winter grade gasoline into the argument is something of a milksop, but if margin premium is being lost in one fuel, refiners look to another but M1 RBOB/WTI crack has lost over $20/barrel in under 2-months. Lower refinery runs, lower margin is likely to see more builds in US crude.

There is some reflection of crude oil weakness in the Asian markets. Outside of a very close cabal, there are very few folks that could profess of knowledge as to the when and how much the SPR buying switch is closed by China. Yet, there has been a distinct lack of urgency in buying that might be considered associated with such a notion. Holding a crude inventory of 1-billion barrels does offer some tolerance as to when an entry into the market is needed, particularly if the contemporary price happens to be unattractive. Maybe this was the case at the ending of the pricing period of September. Dubai was tinkering with a price of $95/barrel, nigh on $10 higher from the previous expiry prompting China in deploying its stock level equivalent of a wild card and sitting the next hand of oil poker out. Indeed, the Dubai cycle has actually seen the presence of some ‘partials’ selling from big China oil companies in the Singapore window, and while the motivation for that action will be occluded to most, it probably confirms that there has been decreased activity on spot or physical buying in this cycle. Evidence for this is easily come by in tracking how the Dubai premium over the month has reduced from over $3.50/barrel to just under $2.

These pressures are not peculiar to Asia alone, according to Reuters research, not only have Nigeria and West African crudes lost premium to North Sea grades, but there are an inordinate number of cargoes left unplaced for November’s cycle, with rumours of over 20 unplaced Nigerian and over 5 Angolan available and furthermore, no Angolan placed as of yet for the December. What has exacerbated some of the shyness of crude buyers is the recent decision by the US to get tougher on Russian oil shipping. The consequence of which has seen freight rates dramatically accelerate. For example, a transatlantic Aframax vessel would use the World Scale, which is normally set as an average of the previous year, as part of the calculation for its freight rate. The scale is measured in $/tonnage and according to some sources has virtually doubled since the US announced its stricter policy and is mirrored on other routes with varying increases, with the obvious outcome that seaborne crudes to some destinations are priced out of the market.

The emotion involved in the horrific scenes witnessed in the Eastern Mediterranean and the ever-present flow charts of thoughts involving a spreading conflagration, makes it unwise to out oneself as a full-blown bear. The air-strikes by the US into Syria we are assured have nothing to do with the ongoing horrors in Israel/Gaza and there is nothing of oil value anywhere, but tell that to the rally this morning inspired by a pre-weekend disposition to be long. However, there are reasons why the oil market cannot hold onto rallies at present, and listed above are a few of them and why we continue with our call of caution.  
 

Overnight Pricing