Market Update

We saw extremely rangebound prices in crude this week, with the September Brent futures contract hovering between $84/bbl and $85/bbl.

The team discuss the nature of the oil market, what’s going on with Dated Brent, volatility, US jet fuel demand, and the upcoming US election debate. Not to mention, Jorge “The Regulator” weighs in on the current state of benchmarks and conspiracy theories.

Refinery margins have been relatively rangebound, although a weakened crude flat price supported margins this past week. In contrast to previous weeks’ performances, the distillates market was lacklustre. Meanwhile, gasoline saw better support on stronger demand indicators. Although refinery margins were not the driver for the recent strength in Dated Brent, this may have spurred some refiners who were originally waiting for lower prices to now make last-minute cargo purchases.

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We saw a very strong performance in crude this week, with Brent futures already up to $84/bbl. The team discuss market dynamics, emphasizing the shift from deep contango to backwardation in crude structure. After a recent positional reset, the market appears more balanced, with summer demand looking healthy.

The team go on to discuss the history of repricing in the oil markets, with Greg noting that big market moves often come from unexpected events. For example: recession expectations in the past were priced in, which actually ended up preventing their occurrence. Similar dynamics apply to oil markets, with Q3 summer bullish expectations unfulfilled due to extreme positioning, highlighting that major moves only happen with significant shifts in market sentiment and the largest profits often come from low-volatility markets with high prices.

Looking to the refinery margin, the crude flat price has increased, while the cracks and spreads seem to be having a massive sell-off over the past two weeks after loads of stop outs in the European gasoline market. It has s created a snowball effect, sending the margins down as players have become quite hands-off in Europe and in the US, signified by the decreasing open interest. The unexpected sell-offs are moving the market in a unfamiliar way into summer driving season.

Macro specialist James Brodie says this week the market is reacting to lower CPI, PPI and very weak consumer sentiment reading. However the U.S. Federal Reserve surprised the market with a hawkish statement, but the bond market disagrees and is pricing in more aggressive rate cuts.

Brent is back in the $80’s this week after a huge rebound and initial sell-off post-OPEC meeting. Crude flat prices are back to where we were pre-OPEC meeting, as the August contract fell to lows of $77/bbl before climbing all the way back up to $82/bbl this morning.

The M1 refinery margins in Europe continue to weaken this week by nearly $0.35/bbl; however, the same in Asia climbed by $0.55/bbl this week. Asian margins appear to be picking up compared to how low they were at the end of May. The market still looks less confident about gasoline, though.

The summer demand looks like it’s manifesting in jet fuel in Asia, due to strong aviation demand – which is soaring as travel returns back to pre-Covid levels.

Looking to the macro market, James and Greg discuss why unemployment has ticked up 4.4%. As demand is falling, people aren’t spending as much, and lower-income households are hurting. Full-time work is declining, and people with multiple part time jobs are on the rise. This isn’t a great sign for the economy.

The trade idea for this week is long US propane.

Brent Futures have been extremely bearish following US markets open, dropping to $77/bbl Monday morning. It’s all about OPEC, as the meeting over the weekend saw existing voluntary cuts extended into September 2024. This move hinted at OPEC’s willingness to bring back barrels to the market. However, doubts remain about compliance from certain members and future global demand growth.

Refinery margins are overall weak, with low US gasoline demand and overall US weakness permeating the European market. However, the market has seen decent buying in Q3 at these lower levels. CFTC data for the week to May 21 showed money managers removed around 5.8mbbls of length (-7.4%) and added over 5.5mbbls (+23%) to their short positions in gasoil futures.

The team analyses looks at US fundamentals. With factors including potential hurricanes, heatwaves, and exports potentially tightening supply, WTI prices could decline relative to Brent. Martha’s trade idea for this week – to short July WTI/Brent swaps – ties in.

Brent Futures have been volatile and rangebound this week, dropping to around $81/bbl and supported again over $84/bbl. With the OPEC meeting next week (and being held online), there’s been conversation that Russia has overproduced oil output, but will be correcting lower after not adhering to the April quota due to over production. This audit will be used to update production baselines.

Crude futures climbed over the week, surpassing $84/bbl on Monday morning, which was the first weekly gain in 3 weeks.

Heating oil and gas oil were the most negative in the refinery margin change this week. We saw strength come back into EBOB and Gasoil which has helped the products we look at in the swaps market in Europe see greater strength.

James says the macro news last week was the US CPI data, which is falling again. There was also weaker than expected retail sales and industrial production, dragging US yields lower. Elsewhere, the big movers of the week were in the commodity markets, with copper, gold, even orange juice at all-time highs. Silver though was the big mover, breaking key resistance at $30 and now targeting all time highs of $49.8. Nickel, tin, zinc, aluminium….. are all surging higher as well.

The team also discuss the big shale oil story coming out of the US regarding a wave of class action lawsuits, after regulators claim the industry conspired to curb production.

The trade idea this week is buy Long Jun/Jul DFL.

Brent crude is consolidating around $82-83/bbl. The big story over the weekend was Iraq’s oil minister, Hayyan Abdul, saying on Saturday that Iraq would not agree to renew cuts, but flipped on Sunday, saying that Iraq will continue to cooperate with other member states about this cut.

Looking to the refinery margins, spreads have collapsed with stop outs driving the movement. There was a significant drop in RBBR, down to just $21.50/bbl in Jul. There has been a build in EIA gasoline stocks (900kbbls) and refinery utilisation is up 1% .

The big Macro news headlines have kicked off with Roaring Kitty returning to X (formally Twitter) yesterday, which has already resulted in a 70% rally for GameStop. The key data this week is U.S CPI expected to drop from 3.5% YoY to 3.4%. Reaction is critical, with 10yr at key levels. 4.40% is key support.

Onto Googling Oil, the major headlines discussed this week are; Russia finding a huge gas and oil reserve in British Antarctic territory and EU potentially calling time on Russian LNG imports.

The trade idea for this week is; Short Q3 380 east west.

In last week’s podcast, we had started to see pressure in the crude futures contracts, and we’ve slid to a new low of this cycle today at $82.30/bbl.

Refinery margins were the major reason for bullish Brent over the past few months, however now it’s the major reason market sentiment has flipped. Margins have strengthened slightly week-on-week, but that’s on the basis of weaker crude competing against even weaker products. It’s a self-fulfilling cycle where weaker margins are dampening demand – which reinforces bearish sentiment for structure and spreads.

Brent futures opened at $87.50 per barrel, seeing a $1 decrease due to promising ceasefire negotiations, with a Hamas delegate heading to Cairo on Monday. The market is rather sanguine on geopolitical risk, and has been de-risking over the past week, with open interest in ETFs seeing a substantial decline.

Looking at the past week, the oil market was too long and had to de-risk.

Brent Futures saw a week of stagnation and mean reversion, $90/bbl oil was very short lived and sell-off was driven by speculative positioning cycles as market participants took off length amid a waning geopolitical premium.

Looking to the refinery margin change, Dated Brent was weaker than last week and is now seeing a little bit of support, whilst gasoil continued to weaken. Martha notes the difference between the straight run and more complex products including some interesting moves in VGO prices.

The ones to watch this week are gold and tech stocks. Gold broke higher out of the $2080 resistance level the same week S&P and Nasdaq topped. However tech stock giant, Nvidia was down 21.8% from all-time highs on the week.

The big stories to follow in our “Googling Oil” segment this week are; US reimposing oil sanctions on Venezuela after broken election promises and Louisiana State University allowing Shell to influence studies after a $25m donation.

The Trade Idea for this week is to go long May Gasoline E/W.