Tale of two cities

Published at 12:02 16 Apr 2018 by . Last edited 15:12 5 Nov 2018.

Geopolitics was in the driver’s seat last week, with the market getting spooked by Syria largely because of what it might suggest about US intentions towards Iran. Until there is more clarity on US sanctions on Iran after 12 May, traders may be hard pressed to go short for long periods, but we expect prices to sell-off this week as the Syria strikes and Russian response were limited and the move up in prices and spreads last week was largely driven by non-fundamental factors.

Moreover, despite clear risks to supplies from the rising geopolitical tensions, prompt crude fundamentals have not strengthened in the last few weeks, with floating storage off China rising further, Chinese teapot refinery runs set to remain weak through Q2 18 implying weak crude demand and Atlantic Basin crude diffs still weak, as an influx of US exports is expected. But European refinery works are picking up now and peak in May, so crude weakness is seasonal. Elsewhere, crude demand is still solid, with June Middle Eastern crudes trading strongly.

Indeed, in our recent meetings with Asian refiners, the mood outside of China was buoyant, supported by strong demand and despite a broad acknowledgement that crude prices will rise further. Naphtha was the hottest topic amid cuts to condensate supplies made by Iran to Korea, while jet and distillates were also supportive. Only the outlook for RBOB is bearish.

Although crude stocks are building in April, this is consistent with our balances as global refinery works peak. We remain optimistic about H2 18 crude balances—particularly over the summer—which could easily push the backwardation in Brent spreads to three-digits. It is just that in the near term, amid such high net long positions, the market will be susceptible to pullbacks.

Global refinery maintenance, mb/d Short-term floating storage, mb
Global refinery maintenance Short-term floating storage
Source: Company reports, Energy Aspects Source: Energy Aspects

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