Commodities Chronicle: Oil Market Resilience and Middle Distillate Strength

The Commodities Feed: Oil remains well supported

Energy markets remain well supported. ICE Brent is holding above US$90/bbl as the market tightens, whilst extended maintenance in Norway has supported European gas prices.

 

Energy - Middle distillate strength

The oil market ended little changed yesterday with ICE Brent still hovering above US$90/bbl. The tightness in the market and expectations that this will continue through until the end of the year suggest that prices will remain well supported.

However, where there is even more strength in the oil market is in middle distillates, where the prompt ICE gasoil crack is trading above US$40/bbl, whilst the outright price is back above US$1,000/t. Although to be fair, this is the Sep-23 contract, which expires today. However, there is strength along the curve with the market deeply backwardated, highlighting the tightness in the market at the moment. Reports that Russia will cut seaborne exports of diesel by around 25% in September due to refinery maintenance and to ease domestic fuel prices have only provided further upside. The concern for the market is that in most regions inventories are tight as we head closer to the Northern Hemisphere winter - a period where we usually see stronger demand for middle distillates. Therefore, we believe that middle distillates are likely to remain well supported in the coming months, whilst this tightness suggests that the market will also be volatile.

European gas prices remain well supported with TTF settling close to 3.9% higher yesterday. Australian LNG strike action will be supportive, however, extended maintenance at Norwegian fields is likely the bigger driver. Maintenance work at the Troll field has been extended yet again, which is impacting around 125mcm/day. This work is expected to go on until 13 September and then capacity will be brought back gradually in the coming days and weeks. Norwegian flows are currently around 135mcm/day, down from around 330mcm/day in mid-August.

Looking at the calendar day today, OPEC will release its monthly oil market report, which will include August production numbers for the group, along with their latest outlook for the oil market. The report will likely continue to show expectations that the market will tighten for the remainder of the year. Then later in the day, the EIA will release its Short Term Energy Outlook, which will include their latest US oil production estimates for this year and 2024. Given the downward trend in US drilling activity, it is difficult to see any large upward revisions in output estimates