By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia
Oil prices have ticked higher to start the week, as many Asia-based market participants remain offline for the Lunar New Year Holiday. The key discussion around the market centres around the potential impact of the Russian oil product ban due to be imposed on 5th February, which will starve Europe of its largest supplier of diesel. There is just cause for concern across the market, given the outsized role Russia plays in global middle distillate markets amid surging demand from China. However, much uncertainty remains as to the extent of any given price impact, as Europe has built out its middle distillate inventories by over 40% since August. This has been achieved amid unusually strong seasonal demand due to crises in natural gas, nuclear and hydropower sectors; the scale of the rebuild looks set to limit the impact of the systemic shock in early February.
ICE Gasoil has already begun to embed expected tightness, rising by nearly 18% from its recent low on 4th January to touch $1,000/Mt (for the first time since October). This is a more pronounced price swing than all of the most liquid physical middle distillate markers in that time, demonstrating an element of speculative betting ahead of the ban on Sunday week. Indeed, the ICE Gasoil net long rose by over 20% in this week’s Commitment of Traders Report – this being the largest w/w rise since the end of August.
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