We saw a very strong performance in crude this week, with Brent futures already up to $84/bbl. The team discuss market dynamics, emphasizing the shift from deep contango to backwardation in crude structure. After a recent positional reset, the market appears more balanced, with summer demand looking healthy.
The team go on to discuss the history of repricing in the oil markets, with Greg noting that big market moves often come from unexpected events. For example: recession expectations in the past were priced in, which actually ended up preventing their occurrence. Similar dynamics apply to oil markets, with Q3 summer bullish expectations unfulfilled due to extreme positioning, highlighting that major moves only happen with significant shifts in market sentiment and the largest profits often come from low-volatility markets with high prices.
Looking to the refinery margin, the crude flat price has increased, while the cracks and spreads seem to be having a massive sell-off over the past two weeks after loads of stop outs in the European gasoline market. It has s created a snowball effect, sending the margins down as players have become quite hands-off in Europe and in the US, signified by the decreasing open interest. The unexpected sell-offs are moving the market in a unfamiliar way into summer driving season.
Macro specialist James Brodie says this week the market is reacting to lower CPI, PPI and very weak consumer sentiment reading. However the U.S. Federal Reserve surprised the market with a hawkish statement, but the bond market disagrees and is pricing in more aggressive rate cuts.