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Europe oil outlook rosier than Russia’s

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

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Europe oil outlook rosier than Russia’s
 
Harry Altham
Energy Analyst, EMEA & Asia
harry.altham@stonex.com

Oil has managed to stave off concerns over the state of the global economy for the bulk of this week, despite hawkishness emanating from central banks across the West. With Brent moving $4 lower as of 10am BST in a possible profit-taking move, the next level of technical support is the September low of $87.24. We have been told of China’s plans to export 107M bbl of oil products to the Asia-Pacific region, which in theory should add weight to bearish sentiment which has remained largely at bay midweek. We continue to see relatively few threatening disturbances in the Cape Verde storm cell region that we view as being threatening to U.S. Gulf Coast oil facilities. Hurricane Fiona is the only existent major storm, and though it is both large and powerful, its northeastern trajectory from a relatively northern position in the West Atlantic leads us to believe it could weaken (due to lower ocean temperatures at higher latitudes) and make landfall far away from anywhere in the Gulf of Mexico. 

image 50211
Source: Bloomberg, StoneX
WHO WILL BUY OIL FROM RUSSIA?
Over the month of September, the Dec/Dec Brent spread has gained $2 to reach $10, which we see as a consequence of a marginally tighter buyers’ market following the imposition of an E.U. oil embargo in early November. At the time the embargo was announced in May, we held the belief that the six-month period ahead of imposition would allow both Russia and the E.U. to find alternative markets for selling and purchasing respectively. As we near the moment of the embargo’s imposition, we believe Europe is in a better position than Russia, although significant challenges lay ahead. This is primarily because Europe has a multitude of options from where it can purchase alternative oil supplies – while, at present, Russia does not. Russia has thus far found three major buyers for its oil – China, India and Turkey – and unless it can find further purchasers, which looks uncertain, Russian oil production could fall by more than 2M bbd next year (20% of total pre-war production). 
image 50214
Source: Bloomberg, StoneX

For Europe, the key challenge is to ensure the replenishment of generally low levels of national middle distillate inventories across the continent, exemplified by the eight-year seasonal low gasoil stocks in the ARA region. Europe continues to import around 800k bbd of middle distillates from Russia (July 2022), so finding alternative sources of refined products in the midst of a global refining crisis could appear difficult. However, Europe still has three more months to purchase Russian diesel before the refined product embargo comes into force, which allows other purchasers to build their own stockpiles ahead of Europe’s entry into other diesel markets. Indeed, diesel stocks across the Asia Pacific Region have grown considerably in the last six months, leading us to believe that Europe can purchase Middle Eastern diesel without being in hot competition with Asian buyers this winter. This is particularly important as Europe’s middle distillate demand is likely to be up to 400k bbd higher than seasonal averages this coming winter, due to surging natural gas prices and European Union mandates to use substitutes in industry and heating. 

 
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