The oil market is caught in a tug of war between two extremes, creating significant intra-day price volatility but equally, largely constant quarterly price averages. Macroeconomic risks remain a perennial worry for the market but pulling in the opposite direction are rising geopolitical tensions, most notably military escalation on the Turkish-Syrian border over the last week.
Crude supplies also face bipolar forces. In the US, oil production has risen to levels not seen since 1996, while Iraqi exports are at their highest in three decades. However, non-OPEC supply outside of the US continues to disappoint, with Brazil, the FSU and the North Sea particularly weak.
Refined product markets similarly face two apparently opposing forces. On the one hand, stellar refinery margins due to a series of refinery outages imply refined product balances are likely to weaken once refineries return from maintenance and outages. On the other hand, extremely low product inventories mean we are unlikely to see a significant softening in product prices in Q4 even if refineries return and run hard.
Overall, while easing from current highs, we expect cracks to remain strong in Q4, in turn, keeping crude well bid. While gasoline crack spreads should ease heading into winter, strong distillate cracks should incentivise refineries to increase output. It is only in Q1 13, after winter demand has subsided and the slated refinery new builds come online, that product balances are likely to ease materially.