middle distillates

The Commodities Feed: Oil dips following hawkish comments from Fed Chair Powell The oil market has been unable to escape the pressure from a more hawkish Federal Reserve. And this is despite a supportive inventory report from the Energy Information Administration (EIA)   Energy – Fed talk pressures the energy complex The oil market buckled yesterday as a result of further hawkish comments from Federal Reserve Chair Jerome Powell during his second day of congressional testimony. ICE Brent fell almost 3.9% on the day towards US$74/bbl. And this weakness has continued this morning. A more hawkish Fed overshadowed what was a fairly constructive EIA report. US commercial crude oil inventories fell by 3.38MMbbls over the last week, more than the 1.2MMbbls draw the American Petroleum Institute (API) reported the previous day and more than the market was expecting. Crude oil exports played a part in this draw, rising by 1.27MMbbls/d WoW to 4.54MMbbls/d. On the product side, small builds of 479Mbbls and 434Mbbls were seen in gasoline and distillate fuel oil respectively. In addition, implied US oil demand (total product supplied) hit 20.93MMbbls/d over the week – the highest number seen since December. Middle distillates remain well supported with the prompt ICE gasoil crack remaining above US$20/bbl, whilst the prompt time spread remains in deep backwardation. The latest data from Insights Global show that gasoil inventories in the Amsterdam-Rotterdam-Antwerp (ARA) region continue to decline with them now standing at 2.04mt, which is below the five-year average and levels not seen since the start of the year. Refinery outages appear to be driving this tightness, which should continue to support middle distillates at least in the short term. There is very little on the calendar today for energy markets. Baker Hughes will release rig count data and if it continues to follow the trend seen so far this year, we can expect a further decline in drilling activity. Higher costs have likely contributed to slower drilling activity. The latest Dallas Fed Energy Survey shows that 60% of producers see drilling and completion costs per well to end this year higher than where they ended 2022. Today's other regular release on the calendar is the latest positioning data from the Commodity Futures Trading Commission (CFTC) and ICE. Given the move in the oil market over the last reporting week and the increase in open interest, we could see the net speculative long in ICE Brent having grown over the week. This is even more the case for ICE gasoil, where open interest has increased from a little under 706k lots to more than 720k lots over the reporting week.  

The Commodities Feed: The need for a risk premium The oil market has opened slightly stronger this morning and this is no surprise given recent developments in Russia. However, the failed move by the Wagner group suggests that any upside in prices will likely be limited.   Energy - Russia instability offers limited upside to oil It was shaping up to be an interesting opening for oil given developments in Russia towards the end of last week. However, the Wagner group's insurrection came to an end as quickly as it started thanks to a deal brokered by Belarus’ Lukashenko. As a result, oil has only seen limited gains so far in early morning trading today with ICE Brent up a little over 1%. While the immediate supply risks have disappeared, the market will likely have to start pricing in a larger risk premium for oil given the growing instability in Russia. How much of a risk premium will really depend on how the aftermath of the failed insurrection is dealt with. In the US, the oil rig count has continued to trend lower. The number of active oil rigs has fallen by 6 over the last week to 546, which is the lowest level seen since April last year. The rig count has fallen by 77 since mid-January and the slowdown in drilling activity will call into question how much supply growth we will see from the US. Falling drilling activity in the US will be welcome by OPEC+ members, as in theory, it should make their output policy more effective, though demand has been a big concern for the market which has more than offset the recent cuts seen from OPEC+ members.   The latest positioning data shows that speculators increased their net long in ICE Brent by 16,116 lots over the last reporting week to 190,386 lots. This move was predominantly driven by fresh buying with the gross long increasing by 12,996 lots. However, given the price action seen since the last reporting week, we are likely to have seen some of these longs liquidate already. The net speculative long in ICE gasoil increased by 12,250 lots to 16,191 lots over the week. This was largely driven by short covering. The gross short declined by 10,319 lots over the period.  Refinery outages have been supportive for middle distillates in recent weeks and if these outages continue, there is room for further short covering.   There is very little on the agenda for energy markets this week with the exception of the regular weekly releases.

The Commodities Feed: More positive US data Oil edged higher yesterday following some good US macro data. However, this data also increases the likelihood of further rate hikes. And the expectation of further hikes will ultimately provide resistance to commodity prices moving significantly higher.   Energy - ARA gasoil inventories fall further The oil market managed to edge higher yesterday with ICE Brent settling a little more than 0.4% higher on the day. This follows first-quarter US GDP being revised significantly higher, while jobless claims also fell over the week. However, stronger-than-expected US macro data also increases the likelihood of further rate hikes from the Fed.  Growing expectations of further hikes is one of the factors which is capping the upside in the market, while on the downside, the belief that OPEC+ will take further action if there is significant further weakness provides a floor to the market. As a result, the oil market continues to trade in a fairly rangebound manner. The latest data from Insights Global shows that gasoil inventories in the ARA region fell by 35kt over the last week to 2mt. This is the lowest that gasoil inventories have been in the region since December and stocks are now around 300kt below the 5-year average for this time of year. It is this tightening which continues to provide support to middle distillates with the ICE gasoil crack continuing to trade around the US$20/bbl level. Refinery outages have contributed to the tightening, but a return of these refiners, the ramping up of new capacity over 2H23 and demand concerns suggest that further upside is likely limited. China will be releasing PMI data today. The manufacturing PMI has been in contraction territory for the last two months and the expectation is that we will see yet another contraction over June. A weak set of data will not be great for commodities, particularly for the metals complex. Other releases on the calendar for today include the Baker Hughes US rig count data. And if the trend seen for the last several months holds, we will likely see a further slowdown in US drilling activity. In addition, the CFTC and ICE will be releasing their latest Commitment of Traders reports. Price action over the last reporting week suggests that speculators should have reduced their net long position in ICE Brent.

The Commodities Feed: USD boosts the complex The commodity complex continues to move higher, aided by the weakness seen in the USD since the US CPI release. For oil, supply disruptions have provided a further boost to the market.   Energy – Oil supply disruptions grow Oil continues to move higher thanks to tailwinds from the below consensus CPI report earlier this week along with weakness in the USD. ICE Brent is now trading above US$81/bbl, the highest levels seen since late April. Brent is set for its third consecutive week of gains. It is not just macro factors driving crude at the moment. Chinese trade data for oil was constructive with flows significantly higher year-on-year and also up month-on-month. In addition, there are some renewed supply concerns. Both Libya and Nigeria are seeing disruptions at the moment. In Libya, both the Sharara and El Feel oil fields are in the process of being shut down due to protests spreading in the country. These fields have a combined production capacity of around 370MMbbls/d. Meanwhile in Nigeria, Shell has suspended operations at its Forcados oil terminal due to a possible leak. The terminal was set to ship 220Mbbls/d of crude in July. Combined, these disruptions are significant and will be felt in a market that is already set to tighten. There is also uncertainty over whether we will see reduced appetite for Russian crude oil, given that Urals are now trading above the G7 price cap. Western shipping and insurance services can only be used for crude priced under US$60/bbl. Russia has tried to blunt the impact of the price cap by securing alternative shipping capacity, but only time will tell how successful it has been in doing so. Both the International Energy Agency (IEA) and OPEC released their monthly oil market reports yesterday. The IEA revised lower its demand growth forecasts for 2023 by 220Mbbls/d to 2.2MMbbls/d, which still leaves oil demand this year at record levels. This should also mean that the oil market still tightens up over the second half of 2023. As for 2024, the IEA expects oil demand to grow by 1.1MMbbls/d. OPEC are more bullish on oil demand, revising up their demand growth forecasts for 2023 slightly to 2.44MMbbls/d, whilst for 2024 the group expects oil demand to grow by 2.25MMbbls/d. This is quite aggressive when considering the uncertain macro outlook. In Europe, refined product inventories in the ARA region have declined for the fifth consecutive week, falling by 53kt over the last week to 5.65mt. Gasoline stocks fell by 30kt over the week to 1.34mt, although stocks are still comfortable and well above the 5-year average. However, middle distillates continue to tighten. Jet fuel stocks in ARA fell by 20kt to 730kt, which is the lowest level seen at this stage of the year since 2018. Meanwhile, gasoil inventories fell by 29kt over the week to 1.93mt, which is around 371kt below the 5-year average. These draws continue to offer good support to the gasoil market, with the crack remaining above US$20/bbl whilst the prompt time spread remains in backwardation.

The Commodities Feed: Supply risks grow Russia’s bombing of port infrastructure along the Danube river in Ukraine has pushed grain prices significantly higher. This escalation risks spilling over into other parts of the commodities complex, particularly energy.   Energy – Oil marches higher Having struggled to break convincingly above US$80/bbl over the last week or so, Brent settled above US$82/bbl yesterday and in doing so broke above the 200-day moving average. The market would have taken comfort from China’s Politburo meeting where the government said it would provide further support to the property sector, stimulate consumption and tackle local government debt. China is key for global oil demand growth this year and the market has been getting increasingly concerned over the weaker-than-expected economic recovery, so any support measures will be helpful in easing some of these concerns. On the supply side, whilst remote for now, risks are growing following Russia’s escalation and bombing of Ukrainian port infrastructure along the Danube River. Whilst this is not a direct threat to energy markets, there are worries that this could spill over into other markets, particularly after Ukraine last week said that any ships heading to Russian Black Sea ports could be treated as potential military targets (in response to a similar statement from Russia). Russia ships almost 500Mbbls/d from the Black Sea port of Novorossiysk, while the CPC terminal in the port exports around 1.2MMbbls/d of Kazakh oil. Therefore, it is not too surprising that the market is starting to become a little nervous over a potential supply disruption, even if it is a remote risk for now.   In addition, stronger refinery margins are likely adding to some optimism over demand, although the strength in refinery margins appears to be more supply-driven than demand-driven at the moment. The strength has been driven predominantly by gasoline and middle distillate cracks, while fuel oil cracks are also holding relatively firm. European gasoline cracks have hit US$30/bbl, the highest levels since July last year. The strength in the gasoline market has been blamed on several factors, including tightness in the octane market, while hot weather in parts of Europe also appears to have led to some refinery disruptions. The initial strength in margins was driven by middle distillates, which would have led to some yield switching (gasoline to gasoil), however the more recent relative strength in gasoline could now see yields switching back (gasoil to gasoline). As a result, this is also offering continued support to middle distillate cracks. In addition, in the US, an unplanned outage at Exxon’s 540Mbbls/d Baton Rouge refinery, the fifth largest refinery in the US, is also providing some strength to margins. European natural gas prices also rallied significantly yesterday with TTF settling 8.5% higher on the day, taking it back above EUR30/MWh. There will be concerns over what further escalation in Ukraine could mean for the small but still important amount of Russian pipeline gas that runs through Ukraine into the EU. Fundamentally though, the European market remains in a very comfortable position with storge almost 84% full. While uncertainty may provide support to prices in the near term, we expect prices to come under pressure over much of the third quarter, given storage will be full well ahead of the next heating season (assuming no significant supply disruptions).  

The Commodities Feed: Australian LNG strike risk grows European natural gas prices rallied yesterday as the threat of strike action in the Australian LNG industry grew. This is after unions served a strike notice to Chevron.   Energy – A step closer to Australian LNG strikes European gas prices rallied yesterday with TTF settling more than 10% higher on the day after unions in Australia served a strike notice to Chevron for workers at its Gorgon and Wheatstone LNG operations. Strike action is set to start on 7 September, and the Offshore Alliance has said that action will escalate each week until a deal is finally made. The serving of notice does not guarantee strike action, with both parties set to continue negotiations between now and 7 September. However, clearly, the risk of disruptions at both facilities, which have a combined capacity of 24.5mtpa (around 6% of global LNG supply) is growing. Woodside was able to come to an agreement with unions for workers at its North West Shelf facility last week before a strike notice was served. Supply uncertainty will linger in the gas market, which is likely to continue to support Asian LNG, particularly given that these potential disruptions coincide with when Asian buyers usually step up their buying ahead of the northern hemisphere winter. Middle distillates continue to be well supported with the NYMEX heating oil crack remaining above US$50/bbl, whilst the ICE gasoil crack continues to trade around US$40/bbl. A fire at Marathon’s Garyville refinery in Louisiana at the end of last week has provided further support to products. The refinery has a capacity of 596Mbbls/d, making it the second largest refinery in the US according to the Energy Information Administration. The refinery is currently operating at reduced rates and there is little clarity on when operations will return to normal.

Refined products: Middle distillate tightness to persist Refinery margins have been volatile in recent months due to tight inventories and a number of outages over the summer. We expect margins to remain volatile and relatively elevated given the tightness in middle distillates, along with the lack of new refining capacity.   Volatile and elevated refinery margins likely to remain Refined product markets witnessed significant strength over the northern hemisphere summer, which helped to drive refinery margins to their highest levels since last year. Strength was seen across the board, although it has predominantly been middle distillates which have pushed margins higher. More recently, however, margins have started to give back a lot of these gains. Weakness has been largely driven by gasoline as we come to the end of the summer driving season. Middle distillates have also come under some renewed pressure more recently. The latest release of Chinese export quotas would likely have put some pressure on cracks.   Longer-term, refined product markets remain vulnerable. Inventories are mostly tight and global refining capacity has remained largely unchanged since 2019, with new capacity offset by longer-term closures. This is happening at a time when demand continues to grow, leaving markets tight. While there is spare capacity in China, the ability for significantly more refined products to make it onto the world market is restricted by export quotas. This suggests that refinery margins are likely to remain relatively elevated and volatile for the foreseeable future.   China releases further export quotas A delay in the release of the third batch of refined product export quota from the Chinese government initially provided some support to refined product markets. Uncertainty over when we would finally see this released and the volume of the third tranche were supportive. Recently, the government finally issued the third batch, which amounted to 12 million tonnes, more than the 10 million tonnes the market was expecting. This also means that export quotas released to date total 39.99 million tonnes, above the 37.25 million issued over the whole of 2022. The increase in refinery run rates this year has allowed for a higher quota allocation. However, what is not clear is whether the government will release a fourth batch of export quotas. Much will likely depend on how domestic demand evolves over the remainder of the year. Even if we see further releases, it does not guarantee that further quotas will have to be used before the end of the year. As we saw last year, the government may allow some of these to be rolled over into early next year. Higher export quotas have obviously translated into higher export volumes of refined products. Over the first seven months of the year, refined product exports totalled 36.62 million tonnes, up 46% year-on-year. Diesel exports have seen the largest increase with 8.4 million tonnes exported, compared to just 2.4 million over the same period last year.   China refined product export quota releases exceed 2022 levels (m tonnes)

Middle distillates to remain well supported Like last year, the middle distillate market has led the strength amongst refined products. The ICE gasoil crack has traded as high as $45/bbl recently, with the NYMEX heating oil crack hitting highs of more than $50/bbl while Singapore gasoil cracks briefly traded a little over $35/bbl in August. Declining middle distillate inventories have helped to push the market higher, with stocks well below the five-year average in most regions including the US, ARA in Europe and Singapore. The concern is that inventories have been falling and are already low as we head into the northern hemisphere winter, a period where you would expect to see stronger demand. This suggests that middle distillate cracks are likely to be fairly well supported. In Europe, a key issue has been the ability of buyers to replace Russian products. Prior to the EU ban on Russian refined products, Russian gasoil flows to the EU were about 450Mbbls/d. In the lead-up to the ban, there was some front-loading, evident in the buildup of inventory over the latter part of 2022 and into early 2023. Since the ban, the EU has turned to other origins, however, it would appear that this is not enough to fully make up for the loss of Russian supply. As a result, we have seen ARA gasoil inventories steadily declining since late February. Recovering air travel has also played an important role in the renewed strength seen in middle distillates. This is evident in the widening of jet fuel’s premium to gasoil in north-west Europe, whilst the Asian regrade discount continues to narrow. This shouldn’t be too surprising given that air traffic continues to move towards more normal levels. The latest data from the International Air Transport Association show that air passenger traffic (revenue passenger kilometres) in July was 4.4% below the same period in 2019. In fact, in North America and Latin America, passenger traffic is back above 2019 levels. However, Asia is still lagging with passenger traffic 8.8% below 2019 levels. While we could see a seasonal slowdown in jet demand with the end of the northern hemisphere summer holidays, we should continue to see a recovery year-on-year, driven predominantly by Asia. In addition, ongoing OPEC+ supply cuts have led to distortions in the crude oil market, which has fed through to the product markets. These cuts have led to a tightening in the medium sour crude market, which will have an impact on refinery yields, with refiners yielding lighter products as a result. A tightening in gasoil has also attracted speculators to the market or at least has seen a drastic shift in their positioning. This is evident when looking at speculative positioning in ICE gasoil. The managed money position has increased from a net short of almost 33k lots in early May to a net long of almost 94k lots by mid-August – 127k lots of buying, which is close to 95m barrels of buying. Our view is that middle distillate cracks should remain relatively well supported for the remainder of the year at around US$30/bbl, whilst through 2024 we expect the crack to average a little over US$20/bbl.

Hi-5 fuel oil spread likely to widen The high-sulphur fuel oil (HSFO) market has seen significant strength this year. In fact, the HSFO crack traded at an unusual premium in north-west Europe briefly over the summer. A key driver in the strength of the HSFO market has been the tightness in the medium sour crude market, which as mentioned has come about due to ongoing OPEC+ supply cuts. The tightness in the sour market is reflected in the unusual discount of the Brent/Dubai spread. In addition, the European market would have been supported by reduced Russian flows since the EU ban was implemented earlier in the year. Over the summer months we would have also seen the usual stronger demand in the Middle East for cooling purposes. This demand should ease in the months ahead, which should support the view of weaker HSFO cracks. Already, we have started to see these cracks weakening from their recent highs. However, this weakness is likely to be somewhat limited given the tightness in the medium-sour crude market. As for very-low sulphur fuel oil (VLSFO), we expect this market to be relatively well supported given the strength that we are seeing in middle distillates and the expectation that the middle distillate market should hold up relatively well through the coming months. Therefore, given expectations of some weakness in HSFO and support for VLSFO we believe the Hi-5 (VLSFO-HSFO) spread will widen from current levels. It is also worth pointing out that we are not far off from levels where this spread has historically found some good support.

The Commodities Feed: Oil remains well supported Energy markets remain well supported. ICE Brent is holding above US$90/bbl as the market tightens, whilst extended maintenance in Norway has supported European gas prices.   Energy - Middle distillate strength The oil market ended little changed yesterday with ICE Brent still hovering above US$90/bbl. The tightness in the market and expectations that this will continue through until the end of the year suggest that prices will remain well supported. However, where there is even more strength in the oil market is in middle distillates, where the prompt ICE gasoil crack is trading above US$40/bbl, whilst the outright price is back above US$1,000/t. Although to be fair, this is the Sep-23 contract, which expires today. However, there is strength along the curve with the market deeply backwardated, highlighting the tightness in the market at the moment. Reports that Russia will cut seaborne exports of diesel by around 25% in September due to refinery maintenance and to ease domestic fuel prices have only provided further upside. The concern for the market is that in most regions inventories are tight as we head closer to the Northern Hemisphere winter - a period where we usually see stronger demand for middle distillates. Therefore, we believe that middle distillates are likely to remain well supported in the coming months, whilst this tightness suggests that the market will also be volatile. European gas prices remain well supported with TTF settling close to 3.9% higher yesterday. Australian LNG strike action will be supportive, however, extended maintenance at Norwegian fields is likely the bigger driver. Maintenance work at the Troll field has been extended yet again, which is impacting around 125mcm/day. This work is expected to go on until 13 September and then capacity will be brought back gradually in the coming days and weeks. Norwegian flows are currently around 135mcm/day, down from around 330mcm/day in mid-August. Looking at the calendar day today, OPEC will release its monthly oil market report, which will include August production numbers for the group, along with their latest outlook for the oil market. The report will likely continue to show expectations that the market will tighten for the remainder of the year. Then later in the day, the EIA will release its Short Term Energy Outlook, which will include their latest US oil production estimates for this year and 2024. Given the downward trend in US drilling activity, it is difficult to see any large upward revisions in output estimates

The Commodities Feed: OPEC+ meeting delayed Oil prices came under pressure yesterday as this weekend’s scheduled OPEC+ meeting has been delayed. Disagreement between members leaves uncertainty over the group’s output policy for 2024.   Energy - OPEC+ meeting delayed Disagreement has returned to the OPEC+ alliance, which has seen the group’s scheduled meeting to discuss 2024 output policy delayed. Unsurprisingly, this news weighed heavily on the market - Brent was down as much as 4.9% at one stage yesterday. However, the market managed to claw back some of these losses to settle just 0.59% lower on the day. OPEC+ was scheduled to meet on 26 November. However, the meeting has been pushed back to 30 November. Several members are reportedly unhappy about their production targets for next year, levels which were announced back in June. This is specifically the case for Angola, Congo and Nigeria, who had their production targets cut since they struggled to hit their 2023 targets. These members were unhappy back then, and it was agreed that their targets would be revisited before the end of this year and possibly revised higher. Clearly, this has not happened. Angola’s output target was cut from 1.46MMbbls/d in 2023 to 1.28MMbbls/d in 2024, Congo’s target was reduced from 310Mbbls/d to 276Mbbls/d, whilst Nigeria’s target was cut from 1.74MMbbls/d to 1.38MMbbls/d. While Angola and Congo are currently producing below their 2024 production targets, Nigeria has managed to increase output recently and is pumping around 1.49MMbbls/d - above its target for next year. Disagreement between members will likely increase volatility within the market over the course of the next week. It is unclear how this will affect broader policy, or whether it could have any impact on Saudi Arabia extending its additional voluntary cut of 1MMbbls/d into early 2024. The EIA’s weekly inventory report was fairly bearish with US crude oil inventories growing by 8.7MMbbls over the week. This leaves total US commercial crude oil inventories at a little over 448MMbbls - the highest level since July. Despite refinery utilisation remaining below average levels for this time of year (following a fairly heavy maintenance season), gasoline stocks still increased by a marginal 750Mbbls. However, the distillate market continues to tighten. Distillate fuel oil inventories fell by a little over 1MMbbls, which leaves stocks at a little under 106MMbbls- the lowest since May 2022 and at the lowest level in at least 20 years for this time of year. We continue to believe that middle distillates will remain well supported.