Sour Crude Harming Margins, While European Gasoil Expiry Looks Bery Weak

Flat price seems to be afraid of the $70 mark in front line Brent and WTI these few sessions. From past experiences, the market tends to fly when it finally break through the up or downside. It is now clear speculators are positioned for the upside medium to longer term as the reflation/rate hike/recovery trade continues. Perhaps a self fulfilling resistance when everyone is trading their gamma around $70. Over the past week, spreads in crude oil and middle distillate has suffered a lot, i.e the rise in price has been led by the longer end of the curve. SFOT sees funds/specs driving this rather than real demand buying at this stage, and perhaps the sustainability of this rally will depend highly on the global macro trading theme. Consumers are not rushing into hedging programme as they are now well aware of the developments of the physical market in crude and distillates, and are probably happy to sit on their hands more than the past years. This is probably less so for producers and SFOT sees potentially more producer flows now that Z11 is above $80.

Sour crude is strong, especially the ones coming out of the gulf. Brent-Dubai, usually the benchmark for sweet/sour spread, is now at its tightest again. The cause being continued reduction in OPEC’s crude (though there have been reports that exports have gone up last month), the result being margins getting crushed in sour crude. If this were to continue, surely demand for sour crude has to come off anyhow as refiners cut loss by cutting runs, sweet or sour.

Brent-dubai diff vs Oman refining margin

European Gasoil M9 contract expires this thursday. This contract has suffered, in very stark contrast to the past few contracts which has rallied into expiry, vs surrounding contracts. SFOT has got it wrong this time admittedly, as it seems physical guys are absolutely running out of storage space for gasoil, and are not keen to take delivery of more gasoil. Top that with asian gasoil being even weaker, we may yet see the weakest expiry for European gasoil yet, unless a few big hands waiting for the last minute. We shall see….