Oil patch: becoming more bullish

Our oil team argue that the entire oil complex will move into more bullish territory with Russian supply constrained, demand robust, and positive technical factors.

Fundamentals strengthening

• This month Russia announced that it plans to increase diesel exports, but Russian diesel is still finding its way onto global markets, despite the European Union’s imposition of an oil product ban on 5th February.
• Exports of diesel from Russia and the Baltic regions to Europe are being hard hit, falling by around 60% month-on-month in February, after exporting just one million barrel per day of diesel to Europe in January
• Around 12 million barrels per day of Russian diesel still cannot be tracked. We believe that up to 8 million barrels per day of Russian diesel is being imported by Turkey, with another 1.5 million barrels per day placed in long-term storage, perhaps to be blended with other middle distillates before future sale to tight European markets
• Industry observers suspect that the missing Russian diesel will find its way to Europe after being re-routed to facilities in the Middle East. Nonetheless, Russia will struggle to raise its diesel exports as planned, despite this re-routing and strong demand from China
• Robust European economies, structural tightness in European diesel markets, constrained supply, and planned refinery maintenance works, all continue to provide profitable arbitrage opportunities for sellers east of Suez
• However, Russian oil product exports to Asia in the so-called ‘dark fleet’ will not be easy or cheap to deliver, given historically high levels of tanker usage and the practical difficulty of re-directing traffic
• Tanker miles are reaching record levels; tanker rates have dropped, but we do not expect this to last if East of Suez demand for Russian barrels persists in the spring

Technicals supportive

• Technical factors continue to hold back oil prices: dollar strength, rising interest rates, political risk, building inventories

• Benchmark West Texas Intermediate (WTI) crude oil price hit $79.9 per barrel last week, approaching the 150-day moving average previously crossed several times this year, but without breaking upwards
• Diesel prices also remain below the 150-day moving average with no support for an upward move at present. Supplies of diesel have been building, and physical markets remain weak – both untypical for this time or year
• Near-term futures contracts for crude oil are in contango, with futures prices above spot prices. Contango is a situation where the futures price of a commodity is higher than the spot price. Rising global inventories explain this position
• Longer-term futures contracts for crude oil are in backwardation, with futures prices below spot prices. Backwardation occurs when the current price is higher than prices trading in the futures market. This is caused by a shortage of the commodity in the spot market
• Diesel futures remain in backwardation, making fixed-price contracts more attractive to consumers
• Strength in the prices for refined products with respect to crude oil continues to point to refining bottlenecks and an upcoming maintenance season
• Refiners prospective profitability rose, indicated by a widening ‘crack spread’, reflecting the difference between crude oil input prices and the output price for major refined products like diesel and gasoline
• Gasoline cracks also gained by over 20% week-over-week

Oil market analysis by Harry Altham and Alex Hodes

Contact: [email protected] and [email protected]