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A Week Of Weakness To Worry The Oil Bulls

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

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A Week Of Weakness To Worry The Oil Bulls
 
Harry Altham
Energy Analyst, EMEA & Asia
harry.altham@stonex.com

Crude markets have fluctuated around last night’s settlements in trading this morning, having lost nearly 8% this week due to concerns of oversupply amid seasonally weak demand and surging COVID-19 cases in China. In the physical markets, we have seen India’s purchases of U.S. crude ACCELERATE in the last two months of 2022 to make it the top destination of U.S.-sourced crude (United Kingdom comes top when counting Canadian crude exported via the United States). For the month ahead, we have seen indications that Europe will begin to dominate flows out of the United States as the Russian embargo takes hold, which could close the WTI deficit to Brent between now and March (where we believe Latin America will return to dominate U.S. exports, therefore pushing Brent’s onus towards Middle Eastern fundamentals). Elsewhere, we saw a correction in European natural gas prices that took Dutch TTF back above €75/MWh, as the risks associated with tightening LNG markets dominated; we believe the fundamentals remain bearish and could see prices sink further during the month of January. 

DOE DATA SHOWS CRUDE INVENTORY RISE
Yesterday’s DOE data saw crude inventories rise by 0.4% last week (1.7M bbl), although this falls to a 1M bbl decline when we consider the SPR release; this saw WTI rise by $1 initially before a subsequent correction at 16:15GMT. Several headlines stood out; U.S. refinery utilisation collapsed by 12.4% w/w (largest decline in nearly two years), which we believe is a consequence of the arctic conditions seen across much of the United States during the festive period. Even so, gasoline inventories fell by just 346k bbl and distillate inventories fell by 1.43M bbl, which is considerably less than we would expect given the large decline in plant operations. We therefore expect a significant drop in oil product stocks to appear in the data in the coming weeks, which could be exacerbated by expectations of more cold weather across much of North America. 

image 60008
Source: EIA, StoneX
In addition, gasoline demand fell by 1.83M bbd, which is the largest w/w decline since the imposition of pandemic-related restrictions in March 2020. Though this is unexpectedly weak, we reason that this is because the figure specifically covers ‘gasoline supplied’ and therefore is subject to week-by-week errors if used as a precise gauge for gasoline demand. Over the Christmas period historically, it is rare to see a week without a large w/w drop in gasoline supplied (e.g., 1.55M bbd decline exactly one year ago), and we expect the figure to better reflect market conditions by the end of January.
image 60006
Source: EIA, StoneX 
As a result, between 23rd December and 2nd January, European gas storage utilisation rose by 0.6%. Though such a rise has precedent over the Christmas period (2019 and 2021), the rise has never been this large or lasted as long; gas consumption began to slow as early as 15th December – when milder temperatures arrived across much of Europe. Only in January 2020 has Europe’s gas storage utilisation been higher on 5th January (86.4% against 83.4%), and that year saw gas storage utilisation remain above 50% at winter’s end (although two COVID-affected weeks and a mild end to March will have impacted the data). 
sAUDI aRABIA DROPS ARAB LIGHT PRICES TO EUROPE AND ASIA
Saudi Arabia announced that it would reduce prices of Arab Light to both Asia and Europe as it sees demand for its crude waver amid high COVID cases in China and economic headwinds across much of the West. The continued rise in interest rates and the strength of the dollar are creating natural deterrents to consumption across the world, and Saudi Arabia has responded by cutting the Arab Light premium to Oman/Dubai to $1.80/bbl (lowest since November 2021), while the Light premium to Heavy fell by $1.90/bbl amid weakness in the petrochemicals markets. Around 60% of Saudi Arabia’s oil gets sold in long term contracts to Asian buyers under bilaterally agreed terms; with China and India being the two principal buyers of the blend; the premiums set are reflective of wider conditions across Eurasia (where seasonal weakness is contributing to a short-term supply surplus in crude markets). 
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