Crude oil drops as falling refinery margins sends a chill through the market
By Ole Hansen, Head of Commodity Strategy at Saxo
Crude oil prices were heading for its biggest weekly loss since last month’s banking turmoil-led sell-off and, in the process, most of the gains that followed the OPEC+ production cut announcement on April 2 has now been wiped out. This renewed weakness is being driven by a combination softness in US economic data as well as lower gasoline and diesel margins pointing to softer fundamentals. Developments that have forced traders to reduce longs that were bought following the production cut announcement, the bulk of which were around $84.50 in Brent and $80 in WTI.
The weakness has also been supported by technical selling from traders looking to close the gaps that were left when prices opened sharply higher on April 3, in Brent to $80 and $75.70 in WTI. The big question now remains whether these levels, if met, can hold as it otherwise may trigger additional short-term focused momentum selling, thereby potentially forcing additional defensive actions from OPEC.
Overall, it has been a couple of challenging months for traders with the market whipsawing, first from the banking crisis, then OPEC+ production cuts and now continued worries about the risk of recession and its impact on demand. A concern that is currently playing in the refined product market where margins are under pressure across all the major regions. The weakness is being led by diesel, which powers heavy machinery, such as truck and construction equipment. Lower refinery margins into the peak demand season may lead to lower refinery demand and with that lower demand for crude oil.
Saxo keeps the view that Brent looks set to continue trading in the $80’s for the near future while we wait for the expected, albeit reduced, pickup in demand during the second half – as projected and reiterated by OPEC, IEA and the EIA in their latest oil market reports. A development that will likely boost prices and aggravate an emerging supply deficit in 2H23. However, the recovery in demand is still very uneven with China and a pickup in airline travel accounting for the bulk of the expected increase.
EU gas trades near cycle low on weak demand and strong LNG arrivals
European benchmark gas trades near a cycle low at €40/MWh ($13/MMBtu) with focus on weak demand and storage levels at 57% full being about 20% higher than usual for this time of year. Imports of LNG may hit a record in the coming weeks as US export continues to rise and competition from other buyers around the world remains muted. During the past week, an average 14.3 billion cubic feet of gas flowed daily to US export terminals, an 18.4% year-on-year increase. The combination of these developments has left the market wondering whether EU storage sites can be filled before September – a development that potentially could send spot prices even lower.
However, so far the winter 2023/24 gas price which covers the period from October to March next year has yet to turn decisively lower, still trading around €55/MWh. A sign the market is not entirely comfortable about sending prices lower, primarily on expectations for a normal winter that would trigger higher demand than the recent one.
Further reading : Commodity Weekly: Energy and metals soften after early April jump
