VINACHEM

Global crude oil and refined product benchmarks regained some lost ground Sept. 11 after tumbling to three-year lows as bearish sentiment continued to grip global markets, causing traders to reevaluate price floors and threatening to put pressure on refining economics.

ICE November Brent crude oil futures cratered below $70/b Sept. 10 for the first time since December 2021 as the market continues to test psychological thresholds for the benchmark, while a two-week selloff has left macro-sensitive product benchmarks in freefall. ICE Low Sulfur Gasoil Futures were briefly trading around $627.5/mt Sept. 10, taking prices to their lowest since 2021 and shaving almost $100/mt from prices Aug. 26.

Crude futures stood more than 1.5% higher in midday European trading at $70.25/b, helped by concern that Hurricane Francine will disrupt more US Gulf Coast output and a drop in US crude inventories.

But weak demand data from OPEC and China together appeared to confirm fears that markets are approaching a supply glut, adding to macro concerns fanned by weaker-than-expected US jobs data and risk-off sentiment in the stock market. OPEC trimmed its 2024 growth estimates for a second time in its monthly report Sept. 10, while new Chinese crude import data showed volumes were down 7% on the year in August despite rebounding to a one-year high.

Current prices remain well below expectations of the OPEC+ comfort zone, though the group's ability and resolve to shift prices higher has become a source of speculation as production from non-member states has remained robust. A decision by the alliance last week to postpone planned production hikes by two months proved neutral to market sentiment, with analysts taking the decision as confirmation of distressed demand dynamics.

"We need more convincing comments from OPEC+ that they will abandon the planned production increases to support markets, not kicking the can down the road by a couple of months," said Carsten Fritsch, a Commerzbank analyst.

"I do have a growing suspicion that OPEC+ is giving up on price to get more volume on the market. Maybe this is to deter non-OPEC+ investment in capacity," said Arne Lohmann Rasmussen, chief analyst at Global Risk Management, who nonetheless called the market "too pessimistic" on crude.

Finding a floor

While neither Chinese import data nor revised OPEC forecasts came as a surprise to many analysts, the resulting selloff exposed macroeconomic jitters and challenged expectations of how far prices might fall.

As fears of large-scale disruption to Middle Eastern oil flows have eased and recession risks have mounted, traders have steadily pared their bets on crude. Financial demand for oil has plummeted to record lows, falling by an average of 7 million b/d over the past two months, according to Goldman Sachs, which noted a growing divergence between physical and financial oil demand.

In a Sept 10 note, the investment bank said it now sees downside risks to its recent forecast for Brent averaging $77/b next quarter. Lead trading houses were heard discussing prices as low as $60/b at APPEC 2024, a far cry from the $100/b forecasts of less than six months ago.

PVM, an oil brokerage, set a price floor at $67/b in a Sept. 11 note, blaming the "relentless move lower" on evidence of decelerating demand growth from the OPEC report.

At the end of August, oil analysts at S&P Global Commodity Insights expected the physical Dated Brent benchmark at $82/b in September, then to fall to $80/b by the year's end. Platts, a unit of S&P Global, assessed Dated Brent at $70.56/b on Sept. 10, the lowest since Dec. 20, 2021. Dated Brent has averaged $74.49/b so far in September and $83.47/b since the start of the year.

"Large non-commercial traders have dropped bullish positions in crude....this occurred alongside a more pronounced increase in bearish bets, resulting in a noticeable decline of crude's net length," S&P Global oil analysts said in a Sept. 10 note "On the product side, the increase in bearish bets by large non-commercials was more than 5.5 times higher than the increase in bullish bets."

Refining fallout

The market slump has weighed on outlooks for refiners, as sluggish demand headwinds have ushered in the end of a "golden era" for product margins.

Diesel markets, particularly exposed to macro indicators, have stayed structurally weak as inventories have climbed in Northwest Europe, with the contango for M1/M2 ICE Gasoil futures widening to $3.75/mt Sept. 10, a one-week high. Previously, it hit a two-year record of $5/mt Aug. 28.

Fears of a European overhang have caused speculators to slash bets on price increases, causing net long positions in ICE gasoil futures to nosedive to minus 38,718 in the week to Sep. 3, the lowest since 2016, according to the latest ICE data.

Hurricane risks in the US remain one closely-watched swing factor, with Hurricane Francine expected to potentially hit the Louisiana Gulf Coast as early as Sept. 11 and 25% of USGC oil and gas output pre-emptively offline, according to PVM. Outages would only offer short-term support to product margins, however, with refiners potentially forced to mull run cuts as demand deteriorates.

"We anticipate that margin trajectories will soften consistently through the rest of our short-term outlook horizon. Seasonal uplifts will still occur, but on average, margins will continue to gradually decline, signaling the start of the downcycle for refining," said Commodity Insights analysts in a short-term outlook Aug. 30.

"Now we are at a point where some people should start considering cutting runs," said one European diesel trader. "The question is will they do it or have they already bought the crude for September and will they wait and still run at max capacity."   – Source: Platts –