Preponderance of evidence

Published at 12:28 20 May 2019 by

Please note that next week’s Perspectives will be published on Tuesday 28 May, owing to a bank holiday in the UK.

Following draws in Q1 19, global stocks have risen by 50-60 mb from early April to mid-May (with OECD builds at 16-17 mb). But more than 80% of the April and May crude builds are from China and the US—the former is undergoing peak refinery works and the latter is struggling to raise runs even though works peaked in February, due to unplanned outages.

These crude builds together with weak refining margins have led to increased chatter that crude is due for a correction. But flat price has mostly been range-bound in recent weeks and remains grossly undervalued versus spreads as fears of trade war, Trump changing his mind on Iranian waivers, and Saudi Arabia pre-empting the Iranian output losses continue to haunt the market.

However, the rampant rally in timespreads and physical differentials can take a breather here if refiners pull back crude buying and draw down crude stocks, though the downside risk to spreads and differentials is modest given just how tight crude supplies are—from declines in Iranian and Venezuelan output, the loss of clean Russian crudes, and now unplanned outages in the North Sea. Crude can only fall by so much when supplies are falling faster than demand.

Moreover, margins have already started to recover, though this is hardly a surprise given that clean product stocks are not high and as low runs could lead to diesel going hand-to-mouth ahead of IMO 2020 as we see in crude today. If the margins recovery is sustained, then refiners will boost utilisation, and thus their crude buying. If the rally in timespreads and differentials pauses or even corrects marginally, and the geopolitical tensions in the Middle East invoke renewed interest from generalists in the oil space, flat price could catch-up, reducing its divergence vis-à-vis spreads.

Brent cracking margins, $ per barrel Global crude stocks, mb
Source: Refinitiv, Energy Aspects Source: Orbital Insight, Energy Aspects

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