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Despite rising geopolitical tensions, demand concerns continue to dominate proceedings. Rumours of demand weakness a few months ago have become market gospel today and so the sustainability of the recovery in refining margins is being questioned. The prompt crude overhang is compounding the doubts, with unsold cargoes across West Africa, the Med and the North Sea.
While we believe this overhang is due to the PES closure and refinery run cuts that took place across May and June leaving refineries with excess crude, the market is cautious; at exactly this time last year, a prompt overhang translated into a collapse in physical crude markets and Brent spreads. Last year’s culprit was Saudi Arabia pre-empting Iranian supply losses and raising output just as US production surged. We believe this year’s cause is demand rather than supply. As long as demand doesn’t collapse, the margins recovery should persist, helping to reduce the surplus.
Indeed, crude stockdraws have already begun. Since the first week of June, US crude inventories have fallen by some 30 mb, even as refinery runs have been relatively stable around 17.2 mb/d. European crude draws have stalled, but Asian draws continue as runs are recovering. Outside of Iranian and Caribbean onshore stockbuilds, non-OECD crude stocks are also falling.
But total liquids have been building slightly, largely due to a flood of NGLs. In the year-to-date across the four main products and in the primary trading hubs, stocks have risen by less than 3 mb but have drawn elsewhere. Globally, products have drawn marginally. While product stocks may not have drawn, they have not built either as the weakness in demand has been offset by fall in supply. So, barring outages related to geopolitics, crude may be stuck in a rut for now.
|Fig 1: Global oil demand revisions, mb/d||Fig 2: Dubai cracking margins, $ per barrel|
|Source: Energy Aspects||Source: Refinitiv, Energy Aspects|