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Global PMI Data Signalling Weakness in Global Economy

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

Global PMI Data Signalling Weakness in Global Economy
 
Harry Altham
Energy Analyst, EMEA & Asia

The crude complex has moved higher again this morning, with WTI’s gain (0.95%) around 25% greater than that of Brent (0.75%) in percentage terms. The weekend’s news that OPEC+ would cut production by over 1.1M bbd is raising the prospect of greater transatlantic oil trading, which is helping narrow WTI’s roughly $4.50 deficit to Brent in trading this morning; this despite the early impact causing relative initial strength in European and Asian blends yesterday. Crude’s front-year spreads have made a quieter start to the morning, although the production cut is seeing the backwardation structure steepen in H1 2024. 

image 67850
Source: ICE, CME, StoneX

Brent finally appears to have made a firm break above its 100 day moving average, having encountered technical resistance on five occasions since it broke through to the downside in July 2022. The 14-day RSI is approaching 64, which still falls short of overbought conditions but is nonetheless the strongest reading since May 2022; intraday RSIs (10 day) currently show overbought conditions (70.9) for the first time in ten months.

image 67851
Brent & 100-day MA, Brent 10-day RSI. Source: Bloomberg.

Iraq and Kurdistan have reached an agreement to resume 400k bbd of exports via the Iraq-Turkey pipeline, with flows expected to begin later today. Last week’s disruption saw exports via the Ceyhan complex of terminals halve from four to two million barrels (w/w), with remaining exports at the three facilities made up of Azeri and Kazakh oil blends. 

The reopening of the pipeline will be a welcome relief for gas oil markets, for which both Kirkuk and Zakho crudes are significant in that their light to medium API gravities yield 23% and 30% gas oil volumes respectively. The geographic proximity to Europe, particularly since the imposition of the oil and product embargoes on Russia, has elevated the importance of the Ceyhan terminal as a port of origin. A combination of damage during the Turkey earthquake, the imposition of the oil product ban and the advent of large-scale French refinery strikes contributed to volatility in gas oil spreads seen earlier this year.

Both of the Kurdish grades are sour, but they do provide high quality hydrocracking feedstock for further middle and light distillate production as part of their roughly 40% residuals yield. Indeed, we expect to see cash premiums for HSFO blends ease down a touch in the Med region, which will be aided by relative weakness in downstream demand-side conditions. 
Both fuel oil and gas oil (particularly the former) are particularly susceptible to the health of the global economy as prices see strong (albeit lagged) correlations with European and U.S. consumer goods spending statistics. Poor PMI data out of Northeast Asia showed demand weakness both domestically and abroad, while the Caixin PMI reading coming in below official figures (50 versus 51.9) is reflective of relatively weaker conditions for SMEs in China. Interestingly, ASEAN PMIs generally fared better, but this is something we put down to the generally more price inelastic nature of manufactured goods across the region. 
image 67852
Source: S&P Global, Caixin, StoneX
The PMI readings from Japan (49.2, fifth consecutive contraction (although showing signs of improvement)) and South Korea (47.6, ninth consecutive decline) are preliminary indicators that fuel oil cash bids could see sustained weakness during the month of April, particularly in the East Asia region. 
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