By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia
Oil looks set to end the week lower once again, as technical indicators demonstrate significant weakness in physical markets, particularly out of Asia. This morning, the complex is capitalising on dollar weakness; part of the greenback’s losses this week came from dovish Federal Reserve minutes, which indicated that benchmark interest rate increases would increase in smaller doses from December. The mini-rally has pushed crude benchmark spreads above near-year lows reached yesterday, in which the Brent prompt spread briefly went into contango. The technicals give scope for further price recovery today as the five day moving average of $86.68 has been breached, while the 14-day RSI remains below 40 – considerably below the one-month average of 49.
Russia has responded to the impending sanctions against its oil industry by ramping up seaborne exports from its western ports, defying expectations of a gradual shift away from Russian diesel by the European Union. The figure for December is thought to be around 600k bbd (which does not include oil transported by rail to those ports, according to Bloomberg [who obtained the data]). There has been pronounced tightness in diesel markets for some time, which is reflected in the strength of the ICE Gasoil forward curve. However, we believe the arrival of sanctions against these diesel cargoes will significantly tighten diesel markets from February onwards. We therefore believe the second/third month gasoil spread’s backwardation is too strong, as we expect there to be considerably greater price pressure for inbound diesel cargoes between January and February; the uncertainty of January’s supply flows is also likely to cause sharpened volatility in the spread.
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WTI and Brent crude are moving to different beats as a possible U.S. Iran deal reshapes the oil market. The two benchmarks are pricing Strait of Hormuz risk in their own ways, and the gap between them says a lot about where crude goes next.
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