After a relatively strong end to the week the oil market has started the week under pressure. ICE Brent is trading back below US$89/bbl at the time of writing. Geopolitical risks appear to have eased considerably, removing some of the risk premium priced into the market. However, there are still signs of tightening in the physical market with prompt timespreads continuing to strengthen. The Brent Jun/Jul spread traded to a high of $1.34/bbl on Friday, after trading closer to a backwardation of US$0.70/bbl at the start of the week. The strength in spreads is aligned with our oil balance which continues to show a deep deficit over the second quarter of the year. The outlook for the year’s second half is less clear and depends on OPEC+ policy.
The easing of geopolitical risk in the market has resulted in speculators heading for the exit. The latest positioning data shows that speculators reduced their net long in ICE Brent by 39,101 lots to 295,831 lots as of last Tuesday. This move was exclusively driven by longs liquidating. NYMEX WTI saw a similar move with speculators cutting their net length by 24,251 lots to 179,646 lots over the reporting week. There were also big reductions in positioning in ICE diesel. Speculators reduced their net lengths by 31,589 lots to 49,536 lots – the smallest position speculators have held in diesel since January. The fundamentals in middle distillates have shifted significantly in recent weeks and the market looks increasingly bearish. Inventories have been building at a good pace, and in Europe, diesel stocks in the ARA region increased by 52kt last week to 2.18mt, taking stocks above the 5-year average for this time of year. The prompt ICE diesel spread has been trading in contango since mid-April, while the prompt diesel crack is trading at its weakest since June last year.
While middle distillate fundamentals are more bearish, there are still lingering risks in the market. There were reports over the weekend of another Ukrainian drone attack on Russian refining capacity. The Slavyansk oil refinery in Krasnodar was the latest to be attacked, and reportedly led to a halt in its operations. The refinery has a capacity of around 1m b/d.
There is not much on the energy calendar this week. We could get the latest Saudi official selling prices later in the week. In contrast, there is a lot on the macro calendar this week, which will also be important for energy and commodity markets. The Fed will meet on Wednesday, where no change in interest rates is expected, while the April US jobs report will be released on Friday.
