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Has it Dawned on Markets That the SPR Release Is Soon to End?

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

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Has it Dawned on Markets That the SPR Release Is Soon to End?
 
Harry Altham
Energy Analyst, EMEA & Asia
harry.altham@stonex.com

Yesterday’s inflation data set into motion considerable instability in the oil markets. United States CPI rose 0.4% m/m in September, which was double the Bloomberg surveyed estimate and significantly raised expectations of further hawkishness from the Federal Reserve; traders have now fully priced in a 75bps rise in benchmark interest rates for November. On a y/y basis, core CPI grew 6.6% - the greatest rise since 1982. The initial reaction saw two-year yields surge by 0.25% and equity indices lose up to 3%, although the S&P recovered to end the day higher. Flat price WTI was among the wild riders yesterday; having partially recovered from a $1.50 drop, another brief period of selling ensued as the headline DOE data implied bearishness for oil, before markets digested a large product and SPR draw (see below) which sent the benchmark back above $89.00. We note the real average weekly earnings figure, which fell from -3.4% y/y in August to -3.8% y/y, as being a particularly worrisome indicator that significant economic headwinds are on the horizon – which poses a significant threat to oil demand. That said, we note that initial jobless claims remain low (228k versus 225k exp.), and consumer spending indices remain above pre-pandemic levels. This leads us to conclude that the most acute impact on oil and product demand will be felt at least six months from now, even as high energy prices squeeze consumers. 

THE SPR RELEASES WILL END SOON, SPELLING TROUBLE FOR U.S. INVENTORIES
As mentioned above, yesterday’s DOE headline figure of a 9.9M bbl rise in crude inventories saw a bout of algo selling – before a closer inspection revealed a more bullish reality. In the week leading up to 7th October, the SPR drew 1.1M bbd, which is the greatest single-week draw on record. In total, a further 3M bbd (net) was drawn across oil products, which indicates that the net figure reflected a draw of just under 700k bbd last week. This is more bullish than the equivalent bottom-line figure would have been over the summer because we are approaching the end of the SPR release period; the EIA recently reiterated that the release would end as planned this autumn. This raises the possibility that U.S. inventories could be in for a significant decline this winter, even as fears mount over the demand landscape. These concerns have pushed the NYM Heating Oil Jan/Feb spread close to the $10 mark; the imminent end of the SPR draws is threatening to tighten the spreads to levels not seen since April (in the aftermath of Russia’s invasion of Ukraine). This has seen the NYM Heating Oil Crack to WTI breach $82; it has only been wider on four days this year (at a similar time to the steepest backwardation levels seen in April). 
image 52249
Source: Bloomberg, Calculations and Images by StoneX
demand in china sends mixed signals
Oil demand in China is expected to decline considerably next week, as the Communist Party Congress gets under way in Beijing. As security is extremely tight, much of the city shuts down to road traffic, meaning we are expecting to see significantly affected road indicators next week. When assessing the wider Chinese market, this week has seen road traffic recover by 11% from the holiday period the week before, according to Baidu data – and this is feeding into apparently declining diesel inventories (reported to be around 122M bbl nationwide, according to OilChem). On an historical basis, this is considered to be a low nationwide inventory level, which is particularly problematic as we enter peak seasonal diesel demand in China; diesel yields at Chinese state-run refineries have risen at a time where run rates are above 75% for the first time since early this year. This raises the prospect that China will re-enter the market soon, which threatens price pressure for European refineries which have successfully been growing gasoil inventories in recent weeks. Meanwhile, commercial passenger flights were down by 42% y/y in the week leading up to 8th October, according to the China Civil Aviation Resources Network; Chinese aviation demand recovery is expected to be the last of the major oil product markets to recover to pre-pandemic levels   particularly if the Government’s zero-COVID approach continues into this winter. 

 

image 52250
Source: Baidu via BNEF

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