Amidst rising tensions between Iran and Israel that came to the fore during last week's UN General Assembly, another spate of fairly poor macroeconomic data hit the headlines. Naturally, oil demand growth has been muted against the backdrop of weak economies, but product markets have tightened significantly.
The tightness in both distillates and gasoline markets has been supply driven, due to the numerous refinery outages around the world. As a result, refinery margins around the world have soared to multi-year highs, in some cases, even surpassing 2008's peaks.
We expect a strong pick up in refinery runs once the refineries emerge from seasonal maintenance. Product balances could start weakening from here, but crude balances are likely to tighten up, lending considerable support to Brent spreads. The colder the winter, the harder the refineries are likely to run, and the greater the positive impact on crude balances, strengthening Brent spreads significantly.
However, what might make a runaway strength in Brent spreads unlikely is an improvement in global supplies. Given Saudi Arabia's commitment to keep the upside in prices in check by keeping the market well supplied, and with Iranian exports now on the rise, OPEC production volumes could well surprise to the upside, at a time when non-OPEC supplies pick up seasonally.