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Canadian Fires Pare Oil Benchmarks’ Losses

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

Canadian Fires Pare Oil Benchmarks’ Losses
 
Harry Altham
Energy Analyst, EMEA & Asia

The oil complex has moved lower this morning amid concerns over fuel demand conditions across the world, despite a series of wildfires shuttering around 250K bbd crude production across Alberta. Last week’s price moves saw the net long in Brent collapse by nearly 35%, with a pronounced fall in long positions across both futures and options. This week’s early-release aviation data are suggesting a strong week ahead, with global growth expected to be around 0.4% and particularly strong w/w consumption changes in Europe and North America.  

The wildfires in Canada are largely out of control, which is heightening the risk factor in regional oil markets. The relevant areas are to the south and west of Edmonton and are affecting production in the Duvernay shale formation area. Cash prices in the region have surged, with the Syncrude Sweet Swap to WTI surging from $1/bbl to $3.50/bbl yesterday. The region exports to the U.S. Midwest via the 634k bbd Keystone pipeline, meaning prolonged wildfires could raise prices in the Cushing hub, which remains a pivotal origin for grades exported via the U.S. Gulf Coast to Europe and Latin America.

Though expansion of U.S. refinery capacity may prove critical for maintaining Europe’s Vacuum Gasoil supply, it is threatening to weaken oil product markets structurally at a time where the market is flashing strong signs of weakness. Exxon’s Beaumont facility expansion is expected to add 620k bbd of capacity, while Galveston Bay and Port Arthur are expected to add just under 150k bbd combined. The Gulf Coast ULSD crack narrowed by 30% in April to bottom out at $20.67 before a mini-recovery in early May, but last week’s floor represented a low dating back to the first trading day of 2022. Weakening cracks raise the possibility that refiners could cut rates to boost margins, which could be a distinct possibility should gasoline implied demand statistics underwhelm in the coming weeks’ DOE data (we currently expect similar demand (around 9.05M bbd) on a y/y basis).
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