Note: This article was first published by HFI Research subscriber. This is part of our new Oil Market Fundamental Daily Report
Oil prices are pulling back slightly today with Brent underperforming WTI and narrowing the Brent-WTI spread. The move today seems to be speculators dumping long positions going into the OPEC + JMMC meeting. In the case of surprises, speculators are taking the cautionary stance of being on the sidelines. While, on the macro front, China / US trade war is warming up, leading to lower risk appetite for those betting on oil prices
But, on the physical market, divergence continues with the Brent 1
Brent 1-2 [Brent2-3 Merkur ]
321 Crack Spreads vs WTI
Source: CME, HFI Research
] Source: CME, HFI Research
As you can see from the above charts, the physical oil market remains healthy despite headline macro concerns. Whatever financial speculators are doing today, physical oil traders are completely ignoring. For the US market, we know that unplanned outages continue to dampen US refinery throughput which has led to crude builds over the past month. But this is going to change over the next few weeks as high 321 crack spreads indicate higher refinery runs
In addition, another metric we closely track is global oil-on-water, which has reached the lowest level over the last 3 years. The decline since the start of May comes from a steep drop in Iranian crude exports, which tanker tracking services are pegging at ~ 500k b / d. Logostical issues in the near term are capping Iranian exports, but we do not expect this to continue going forward
But this confirms the physical oil market's appetite for crude as the lack of oil-on-water just means less supplies globally . As global refineries ramp up into the summer, the physical oil market situation will only get tighter and tighter, which will eventually translate into higher financial oil prices. Our view is that algos, together with energy investors, are staying on the sidelines until they see evidence of storage draws, but especially in the US. Once US storage starts to drop, that's when the fund flows will return.
For our UWT trade, we remain long and holding up to $ 69 to $ 70 / bbl target.
The steep backwardness in Brent timespreads tells us we are about to witness the largest gross drawdown since 2011. [ ] Source: IEA
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Disclosure: I am / we are long UWT I wrote this article myself, and it expresses my own opinions. I'm not receiving compensation for it (other than from Seeking Alpha).