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The physical market is taking a breather as expected, with light grades such as Murban easing from their highs amid refinery run cuts and weak light ends margins (yet again). Brent spreads are likely due for a period of consolidation too, though Dated Brent remains strong despite growing European run cuts as Chinese buying has allegedly picked up. Still, supplies are falling faster than demand, so downside to spreads and differentials will be limited and fleeting.
Meanwhile, despite rising geopolitical tensions, flat price continues to struggle due to demand concerns. Backward-looking data (for March) has come in weak (although Q1 19 global demand still rose y/y by 1.3 mb/d) and forward-looking projections are clouded by the escalating US-China trade war, which is weighing sharply on petrochemical margins globally.
China will step in to support growth as it hunkers down for a protracted trade struggle with the US, though the government stimulus will be kept targeted for now.
Clearly, there are plenty of dark clouds for demand on the horizon that make it very hard for crude to rally, especially if uncertainty around future demand once again triggers destocking by end users (although end-user stocks are low following the significant destocking seen in Q4 18). But this also means OPEC+ will hold its line and refrain from raising production for H2 19.
The supply side of the market is extremely tight, and we do not see that changing anytime soon. Demand is now the key variable, but as long as demand doesn’t contract y/y, we still believe the market will need more OPEC oil in Q3 19, implying higher prices.
|Global oil demand, y/y change, mb/d||Asian polyethylene margins, $/tonne|
|Source: Government sources, Energy Aspects||Source: Argus Media Group, Refinitiv, EA|