Energy: gasoil tightness
The oil market is seeing somewhat of a relief rally in early morning trading today. This follows a relatively large sell-off last week. ICE Brent settled more than 6.4% lower over the course of last week. And this is despite the announced OPEC+ cuts from the previous week. Clearly, the market is concerned over the demand outlook given a deteriorating macro outlook. Last week’s higher-than-expected US CPI only clouds the outlook further with expectations that the Federal Reserve will need to be more aggressive when it comes to hiking rates.
Also not helping the demand outlook is China’s insistence on following a zero Covid policy. Markets have been keeping an eye on China’s 20th Party Congress to see whether this policy might be eased. However, there appears to be no change, so localised lockdowns could very well be a theme that runs through 2023.
The latest positioning data shows that speculators increased their net long in ICE Brent by 15,831 lots over the last reporting week to leave them with a net long of 201,163 lots as of last Tuesday. This increase was predominantly driven by fresh longs. The move likely reflects the market’s initial reaction to the OPEC+ meeting. However, given the more recent weakness in the market, the current net long is likely somewhat smaller.
The latest data from Baker Hughes shows that the US oil rig count increased by eight over the week to 610. This is the highest number of active rigs seen since March 2020. The weakness we have seen in oil prices for much of the summer has meant that the rig count has been largely flat since early July. The EIA will also be releasing its latest drilling productivity report later today.
The prompt ICE gasoil spread continues to trade in a deep backwardation of around US$70/t, reflecting the tightness in middle distillate markets as we move closer to winter. Strike action at French refineries has only further tightened the middle distillate market. Exxon Mobil will restart two of its refineries in France after workers came to an agreement with the refiner. However, operations at Total Energies refineries are still affected after the CGT union rejected the company’s latest offer, despite two other unions agreeing on a deal. The tightness in the gasoil market has attracted speculative money with the managed money net long increasing by 10,050 lots over the last week to 62,085 lots as of last Tuesday.
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