OPEC+ supply cuts

Broader market concerns have weighed on the complex, whilst a stronger dollar has only provided further headwinds. However, for oil at least, the fundamentals remain constructive   Energy: Large US crude draws The oil market continues to come under pressure, with Brent falling 1.7% yesterday, following a raft of weaker-than-expected Chinese macro data this week. The latest Fed minutes will not be helping sentiment, with them suggesting that the US Fed may have some more work to do when it comes to monetary tightening. The strength in the USD over much of the week will also be providing further headwinds to the market. As for WTI, it settled below US$80/bbl for the first time since early August. However, whilst there are broader market concerns, oil fundamentals remain largely constructive as continued OPEC+ supply cuts should ensure that we see sizeable inventory draws for the remainder of the year.  The EIA’s weekly inventory report was largely constructive, showing that US commercial crude oil inventories fell by 5.96MMbbls over the last week.  This leaves crude oil inventories at a little under 440MMbbls, which is the lowest level since the start of the year. Crude oil inventories at Cushing fell by 837Mbbls, leaving them at 33.8MMbbls- levels last seen back in April. The large draw in commercial inventories was largely driven by a rebound in crude oil exports, increasing 2.24MMbbls/d WoW. Refiners also increased their run rates by 0.9pp over the week to 94.7%. Although despite stronger refinery activity, gasoline inventories still fell by 262Mbbls, whilst distillate stocks grew by 296Mbbls. Labour talks in Australia look as though they will roll into next week in an attempt to avoid strike action at several LNG facilities after there was no breakthrough in negotiations earlier this week. Reports suggest that talks will continue next Wednesday. The fact that talks are expected to continue next week has provided some comfort to the market, with TTF settling  2.65% lower yesterday. For Europe, given the comfortable storage situation (90% full), we would need to see a large amount of the roughly 41mtpa LNG capacity at risk, disrupted for a prolonged period, in order to be overly bullish for prices.

The Commodities Feed: Oil cuts and LNG supply risks The oil market continues to move closer to US$$90/bbl. A possible rolling over of Saudi cuts could see it finally break this level. Gas markets will get some more clarity this week on Australian LNG with workers at 2 facilities set to go on strike as soon as this Thursday if unions and Chevron fail to come to a deal.   Energy - Saudi oil cuts The oil market had a strong week last week with ICE Brent managing to settle 4.82% higher, which also saw the market almost hit US$89/bbl and trading to its highest level since January. Support would have come from growing expectations that the Fed could be done with its hiking cycle. In addition, fundamentals remain constructive with the oil market set to continue to tighten for the remainder of the year. This tightening is largely due to OPEC+ supply cuts. However, whilst OPEC continues to cut, there are some producers within the group who continue to see output edge higher (Iran, Libya and Venezuela - these members are exempt from current supply cuts). Preliminary OPEC production data for August is starting to come through and the Bloomberg survey shows that the group increased output by 40Mbbls/d MoM to 27.82MMbbls/d. While Saudi output is estimated to have fallen by 130Mbbls/d to 8.98MMbbls/d, this was offset by increases from Iran and Nigeria. Iranian output is estimated to have increased by 90Mbbls/d to 3.07MMbbls/d. Nigerian output increased by 80Mbbls/d to 1.34MMbbls/d. This week the oil market will be focused on what Saudi Arabia decides to do with its additional voluntary cut of 1MMbbls/d. The Saudis will need to decide whether to roll this cut into October, let it expire at the end of September or gradually ease the cut from next month. We believe that the Saudis will likely roll over the cut into October, as they will not want to put any renewed downward pressure on the oil market, although fundamentally, the market should be able to absorb the return of these barrels, given the large deficit forecast for the rest of the year. The latest positioning data shows that speculators reduced their net long in ICE Brent by 15,544 lots over the last reporting week, leaving them with a net long of 202,227 lots as of last Tuesday. However, given the move in the market since then, along with the increase in open interest, the actual speculative net long has likely increased. Natural gas prices also remain fairly well supported with a combination of continued supply risks around Australian LNG as well as reduced Norwegian gas flows due to ongoing maintenance at fields. Strike action at the Gorgon and Wheatstone LNG facilities in Australia could start as soon as this Thursday if unions and Chevron do not come to an agreement.  

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.

Diesel supply concerns grow with Russian export ban Middle distillate markets received another boost yesterday after Russia announced that it would be temporarily banning diesel and gasoline exports. This is at a time when there is already plenty of concern around middle distillate availability as we head into the Northern Hemisphere winter.   What Russia announced Russia announced that it would be temporarily banning the export of diesel and gasoline in order to try to take some pressure off domestic fuel prices. The ban comes into effect from 21 September with no end date as of yet. Even prior to the announcement, Russian diesel exports had come under pressure through September due to domestic refinery maintenance and efforts from the government to increase supply in the domestic market. The impact on the middle distillate market has been clear: ICE gasoil settled 4.51% higher on the day of the announcement, whilst the November gasoil crack rallied above $37/bbl at one stage, and the prompt ICE gasoil time spread saw its backwardation widen to more than $35/tonne, highlighting the tightness in the middle distillate market.   Middle distillate market rallies on tightness concerns   How important is Russian diesel and gasoline supply? Russia is a crucial supplier of refined products to global markets, with it exporting in the region of 1MMbbls/d of diesel. In fact, Russia is the second-largest exporter of diesel, with just the US exporting larger volumes. As a result, this is a key development as we head into the Northern Hemisphere winter, a period where we usually see a seasonal pick-up in demand. The export ban is less concerning for the gasoline market, with Russian exports of gasoline and gasoline components averaging around 145Mbbls/d so far in 2023, a loss that the global market should be able to absorb more easily. How severe of an impact the loss of Russian diesel has on the global market will really depend on how long the export ban is in place. Although, given the likely domestic stock build we will see as a result of the ban, we would not expect it to be prolonged.   Ban only adds to an already-tight middle distillate market The middle distillate market was already seeing significant strength ahead of this ban with inventories tight in the US, Europe and Asia as we head into the Northern Hemisphere winter. There were a number of factors behind this tightness, including OPEC+ supply cuts, recovering air travel, limited refining capacity growth, and in Europe, the struggle of being able to fully replace Russian middle distillates after the EU ban came into effect in February. The loss of around 1MMbbls/d of Russian diesel in the global market will be felt and only reinforces the supportive view we have held on middle distillate cracks and as a result on refinery margins. This does leave some upside risk to our view that the ICE gasoil crack would average US$30/bbl for the remainder of the year. How much upside really depends on the duration of the ban.  We believe that margins will remain elevated in an attempt to get refiners to increase run rates. However, given that part of the issue is due to constraints in refining capacity as well as tightness in the medium sour crude market, the ability to significantly increase run rates and increase middle distillate supply could be difficult.   Middle distillates inventories are already tight