Volatility dampens amidst the Distillate-led slump in oil values

28.05.2024 By Stanislav Ermilov

Overview

The oil market has been uncharacteristically subdued this month. Flat-price Brent has slipped back to lows within the $80 to $90 range it’s been trapped in since the start of the year. Taking their cue from Distillates, Crude spreads have run out of steam, with values sinking into mild backwardation at $0.30 to $0.40 per spread. Dated differentials, such as Jun DFL trading -$0.40/bbl, suggest Brent spreads may have yet further to fall. Even Gasoline seems to be faltering just before the looming US-driving season. With fewer geopolitical headlines driving volatility, traders are now focusing on supply and demand balances. Middle Distillates are building, in large part due to weak economic growth and huge supply additions east of Suez. These fundamentals are unlikely to change over the summer. In June, macro attention will pan over to the flurry of upcoming general election results, which may begin to set the tone for markets in 2H 2024. The risk of geopolitical escalations in the Middle East should not be overlooked however.

Light Ends

In last month’s report, we noted that Gasoline prices had been bulletproof. This trend has reversed in May, with significant declines in Gasoline contracts globally. The Jun/Jul Ebob spread dropped sharply to $9.25/mt, down from mid-month highs of $15.25. Singapore’s prompt gasoline spreads have also fallen from $1.75 to $0.25 since the beginning of May. Although Gasoline remains in backwardation and is faring better than Distillates, its future performance will heavily depend on strong US demand during the peak driving season. The impact of weaker Gasoline on margins cannot be ignored.

Distillates

As tempting as it will have been to buy spreads at flat or modest contangos on the move downwards, traders may need to wear or roll these positions for some time yet before seeing the upside. Stocks are creeping up across the pricing centres now, and as runs increase globally, Middle Distillates can continue building. US Distillate demand is reported by the EIA as being approximately 240kbd lower YoY. All in all, it’s been a range-bound month for the key Distillate values. Q3 ICE Gasoil cracks are oscillating around $20/bbl, while spreads are maintaining their prompt contangos. Jun/Jul ICE GO is at $-2.50/MT and Jun/Jul Sing GO -0.15/bbl. The June barge diffs in ARA are well priced at $-1.50/MT, validating the contangos seen on the screen. Meanwhile Jet Fuel has turned a corner spurred by strong demand and deep contangos. Singapore Kero spreads are off their lows, whilst EU Jet diffs back on their feet.

Conclusion

The oil market has entered a phase of relative stability with Brent crude prices confined to a narrow range and key spreads showing limited movement. Gasoline, which had shown resilience earlier in the year, has now seen significant price drops globally, dependent on strong US demand as the driving season approaches. Middle Distillates continue to build due to weak economic growth and increased supply, resulting in subdued prices. Despite the potential for limited downside if inventory build rates remain low, traders may decide to maintain their positions for longer for returns to manifest. Patience may be rewarded, but caution must always be taken with position sizing when volatility is likely to return in the second half of the year.

BACK TO NEWS

Related
News

Middle Distillates’ downward move should not be overlooked amidst a jumpy flat-price environment

All eyes will be on Gasoline performance as we enter Q2. While Crude has been more sensitive to Distillates’ waxing and waning in recent years, this year Gasoline seems to be the fraction of the barrel with the most riding on it. Question marks remain over global oil demand growth this year so US Gasoline demand this summer will be a metric high up on traders’ lists of items to track.

All eyes on gasoline as traders look to pin their hopes on Light Ends to defy the demand bears

Red Sea-fuelled Distillates buying spree winds down amidst emergent strength in Crude spreads

As oil markets settle into the new normal of reduced transit through the Red Sea, price action has become less erratic. TC5 has not made new highs, European Jet Fuel (a market hugely dependent on Asian re-supply) has come down dramatically and Gasoil cracks have been on the decline. Crude spreads have rallied significantly, but […]

Imbalance not shortage: Red Sea tensions create re-supply uncertainty in arb dependent product markets

Bar Friday night’s spike, crude has enjoyed an uncharacteristically sedate ascent since the turn of the year. Brent is heading into the mid $80s, and WTI firmly in the high $70s. Despite the barrage of geopolitical risk headlines in the market, flat price has not been a runaway train. While product diffs have been hyper-sensitive […]

Geopolitical risks play second fiddle to an oil market trying to re-price back to fundamentals

Overview Last month we noted the post-summer implosion of US gasoline markets and the risks it posed for the oil complex. This eventually manifested in a spectacular decline in WTI, as refiners shunning crude in the mid-continent translated to faster-than-forecast US crude builds. Brent was not spared – as may have been the case in […]

Clean product markets stutter as geopolitical price boost veils true oil market fundamentals

In moments like this, OTC markets provide a clearer view of oil fundamentals than flat price, which often gets muddled by the noise of speculative fast money. Crude oil started the month on a softer tone, with Brent flat price steadily drifting down into the mid-to-low $80s, from the heady heights of the mid $90s […]

Crude rallies $10/bbl as the rapid grab for physical barrels forces WTI and Brent shorts to fall on their swords

We wrote last month about clean products being far too strong for crude to sit idly by. This did not take too long to correct, with Oct WTI rallying from $80/bbl up to intraday highs over $93/bbl in just three weeks, dragging Brent up with it into the mid 90s. Crude spreads have also done their bit to dampen the clean product cracks down from extreme levels.

Clean product cracks pushing margins back to year-high levels, leaving refiners poised to bid up crude oil

The first half of August saw strength across the entire oil complex. Brent made a push up
towards $90/bbl before easing in tandem with the recent weakness across global equities
(October Brent futures currently trading $83.98/bbl).

Bullish price action in July across the barrel with flat price and product cracks marching upwards

We wrote last month about the disconnect between crude flat price and the stellar performance in clean product cracks. This month crude responded to the strength and the ongoing chatter of accelerated Chinese crude stockpiling, with Brent rallying $10/bbl up to $84/bbl. While crude rallied, gasoline and diesel markets soared higher to make new year […]

Crude in tug of war with gasoline and distillates: June bid/offer and liquidity levels for main market movers

Flat price crude faced significant pressure in June with WTI and Brent struggling to stay above $70/bbl and $75/bbl respectively. The underwhelming performance in flat price is in line with a bearish macro picture and a weak crude physical market, reflected in continually suppressed DFLs and talk of plentiful physical offers in the Singapore MOC. […]

May intraday bid/offer and liquidity levels for main market movers

Stay ahead of the market with Tallarium’s insights and discover the dynamics of the oil market.

How gasoline traders can leverage automation to gain a competitive advantage

Gasoline markets are some of the most unpredictable and complex in the commodity space. This creates both challenges and opportunities for gasoline traders.

McKinsey believes digitisation can provide a competitive edge in metals, but we think the impact will be even bigger for OTC energy

McKinsey believes digitisation can provide a competitive edge in metals, but we think the impact will be even bigger for OTC energy.

What is one of the biggest challenges OTC energy traders encounter every day?

Across the more than 200 traders we engaged with, we saw one consistent challenge emerging time and time again. Read on to find out what.