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Diesel cracks under pressure while crude eyes price gap
Ole Hansen
Head of Commodity Strategy
Summary: The positive price impact of the April 2 surprise OPEC+ production cut continues to fade with incoming data showing some emerging demand weakness, especially for diesel, and following a rapid build-up in speculative longs in the week that followed, the market is now drifting lower, thereby raising the risk of traders attempting to sell Brent and WTI crude oil lower in order to close the gaps that were left when prices opened sharply higher on April 3.
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Global Market Quick Take: Europe
The positive price impact of the April 2 surprise OPEC+ production cut continues to fade with incoming data showing some emerging demand weakness, especially for diesel, and following a rapid build-up in speculative longs in the week that followed, the market is now drifting lower, thereby raising the risk of traders attempting to sell Brent and WTI crude oil lower in order to close the gaps that were left when prices opened sharply higher on April 3.
As OPEC saw signs of emerging weakness in demand for its crude oil, the decision to cut production was made, and it is now becoming clear that the reason for the decision, apart from preventing prices falling further as speculators went on a selling attack amid the March technical downside break, was driven by the need to support its prized asset in order to maximise revenues at a time where US producers have shown limited appetite to boost production.
We keep the view that Brent look set to continued trading in the $80’s for the near future while we wait for the expected, albeit reduced, pickup in demand during the second half as projected and reiterated by OPEC, IEA and the EIA in their latest oil market reports. A development that will likely boost prices and aggravate an emerging supply deficit in 2H23. The recovery in demand, however, is still very uneven with China and a pickup in international travel accounting for the bulk of the increase.
Before then the market will continue to worry about the risk of recession and its impact on demand, a concern that is currently playing out in the diesel market, a fuel which powers heavy machinery such as truck and construction equipment. As per the chart above, refinery margins for diesel remains under pressure across all regions and if continued it may lead to lower refinery demand and with that lower demand for crude oil.
Later today, the EIA will publish its weekly crude and fuel stock report and if last night's report from the American Petroleum Institute should be repeated, we could see a price supportive drop across crude, gasoline and distillates. In addition, traders will be watching gasoline and distillate demand which have recently been moving in opposite direction. Will crude oil production finally be adjusted higher above 12.3 million barrels a day and will Cushing continue to see declines as refinery demand picks up ahead of the summer driving season. The latter together with the OPEC+ cut recently supported a tightening of the WTI prompt spread which briefly moved into backwardation following a prolonged period of contango where the spot contract was trading below the next.
Managed money activity in the week to April 11.
Buying of crude oil moderated during the reporting week following a massive buying spree in the previous week that followed the surprise OPEC+ production cut announcement. Having bought the biggest number of contracts or lots (136k or 136 million barrels) in a single week since December 2016, speculators turned more cautious. Overall, it’s worth noting that the 158k lots (158 million barrels) buying in WTI and Brent post the OPEC+ cut was split almost evenly between 85.6k lots short covering and 72.5k lots of fresh longs. However, considering all of those longs are now under water, the risk of a non-fundamental technical driven long-liquidation phase has risen.
After not breaking key resistance in the immediate aftermath of the OPEC+ production cut around $89, Brent crude oil now trades back below $83.50, thereby raising the risk of a technical correction to $80 in order to close the gap that was left open following the April 3 jump. Before then some support may manifest itself around $82 where the 21- and 55-DMA meet. In WTI a similar sell signal has not yet been triggered with the price still holding above $79.
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