After two days of negotiations the US and China have agreed to a framework to return to the Geneva agreement struck in May, which was aimed to ease the acrimony between the world’s two largest economies. To recap the deal the two countries agreed to lower the reciprocal tariffs by 115% for 90 days only to mutually accuse each other of breaking the deal. Details of the framework have not been provided, and the agreement will now be presented to the two leaders. The market reaction has, so far, been tepid as it is anything but clear how economic growth and global oil demand will be affected.
For now, however, trade-related downside risk in oil has been temporarily removed, yet ominous signs unquestionably persist. The World Bank revised downwards its global growth forecast for this year by 0.4% to 2.3% citing trade barriers and uncertainties. Prospects of healthy economic expansion have been cut for the US, China, Europe and several emerging markets. Last night’s API data was also more on the negative side. It saw gasoline and distillate stocks to have risen by 3 million bbls and 3.7 million bbls respectively whilst crude oil inventories drew 370,000 bbls.

Tight Product Markets

One of the reasons for resilient oil prices is global and regional oil inventories, especially in products. As noted in one of last week’s notes, refining margins are rather attractive based on historical comparison. This incentivizes refiners to up their utilization rates providing solid demand for crude oil. It is reflected in the backwardated nature of the major crude oil benchmarks and in Brent CFDs, which is the differential between the physical marker and the forward contract. Sturdy utilization rates should, at least in theory, lead to increased product supply, which, in turn, ought to show up in swelling product inventories. As the current snapshot suggests, it has not happened yet. The result is stable oil prices.
 Consequently, the importance of closely following changes in global and regional oil inventories cannot be overstated.
This week and next, we will deal with the release of the updated findings on global oil balance and the recent changes in worldwide and OECD stocks. Yesterday’s Short-Term Energy Outlook from the EIA put OECD oil inventories for the second half of the year at 2.815 billion bbls and US commercial stocks at 1.223 billion bbls, considerably higher than 2H 2024. Last month, OPEC saw a 10.3 million barrels climb in OECD commercial stocks, nonetheless, they still showed deficits of 27.2 million bbls and 69.5 million bbls to the corresponding week of 2024 and the long-term seasonal mean. Crude oil stocks rose, and product inventories fell. In March OECD stockpiles covered 60.3 days of forward demand, 0.4 days lower than last year and 5 days under the 5-year average. The IEA estimated that global oil stocks grew for the second successive month in March due to a rise in crude, NGLs and feedstocks but product inventories plunged. OECD stocks remained well below the 5-year average. They covered slightly over 60 days of forward demand, which is less than in 2024. The former will publish its latest numbers next Monday and the latter a day later.

It is perceptible that product inventories have been failing to recover, and this view is confirmed by weekly data from the world’s crucial oil hubs, the US, northwest Europe and Singapore. Although the latest Weekly Petroleum Status Report from the EIA showed a sizable increase in both gasoline (+5.2 million bbls) and distillate (+4.2 million bbls) stockpiles, refined product inventories are still comparatively low. In gasoline, they are 1.1% lower than last year although popped above the 5-year average. On a side note, it will be intriguing to see whether the US Administration’s tax and spending bill, which foreshadows a grim future for the electric vehicle industry, will revive ailing gasoline demand and therefore deplete stocks. Distillate stockpiles fall short of last year’s levels (-12%) and the seasonal norm (-8%).

In Europe’s ARA triangle, as reported by PJK International, combined product inventories, made up of gasoline, gasoil, fuel oil, jet/kerosene and naphtha, fell week-on-week and by the end of May they showed a considerable shortage of 500,000 tons or 9% to last year’s inventory level. They are a tad, 100,000 tons or 2% below the 5-year average. Gasoline, gasoil and fuel oil are all under the stock levels registered a year ago, whilst jet/kerosene and naphtha are above them. With the exception of naphtha, every category is lower than the 5-year average.

In Singapore, based on data compiled by Enterprise Singapore, the stock roundup shows a somewhat looser picture than in the US or Europe. Yet light distillate stocks are significantly lower than last year (-20%) and are 8% below the 5-year average. Middle distillates and fuel oil inventories are both higher than the long-term mean, but the former is below last year’s level. Combined product inventories are matching year-ago stockpiles and are slightly higher than the 5-year average.

On aggregate, the latest review suggests a global product market, which is quite stretched. The major components, light distillates/gasoline, middle/distillates/gasoil and fuel oil are all lower than a year ago. Middle distillates and fuel oil stocks are also under the 5-year average whilst light distillates are close to it. The current snapshot explains strong crack spreads and stable outright prices. It also prognosticates a reversal of sentiment when the triumvirate of refinery utilization, inventories and margins start taking a collective turn.

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