CEO Review
We do, finally, seem to be, genuinely, I think, getting out of this yawn-inducing range on Brent futures.
It has been a long time coming, with the underlying physical crude market tight for a while now, and time spreads and DFLs on a 6-week bull run at least. You could feel the resistance give way last week as expiry performed and the DFLs shrugged off a short-term sell-off to run up to very strong numbers. The texts going around and celebratory body language was a scene out of Top Gun. So we’re pretty sure the majority were long.
But this is good stuff. We needed some conviction and confidence to be rewarded and now the market can breathe a bit. The product crack market was what led the charge, but the levels reached are already expensive and so the narrative logically shifted to crude. But it’s strange as the TARs need to be contended with, which is even more supportive of cracks, but crude has to be so strong given how tight the crude market is. So really what needs to happen now is a flat price rally to price everything into balance.
So where else is there to look now? The condensate end of the barrel looked to be undergoing a restructuring with petrochemical cracking demand low and plenty more capacity coming back online which was hurting sentiment for propane at the very least. This seems to have found a floor now though, and the relentless weakness in Asian propane for the moment seems to be coming to an end. US structure is getting decimated as things fall back in line with historical norms, and the only thing left to go is the US to Asia arb, which is still at elevated levels. As Nat gas trades at lows in the US, and as production comes roaring back from shale fields in Dakota, the rest of Q1 promises some significant crude supply, yet, it is all being seemingly readily absorbed – which logically makes NGLs weighty going forward.
As for the broader market – it is very clear the market is positioned for refinery outages as we have said before. These outages keep happening, and this is outside of maintenance. The hot summers are getting hotter, refinery fires are likely, and the crude market is on fire. So it is hard to argue with the market position of long products in Q3 and long prompt crude. With it seeming so logical, and the market position performing so well, we will likely accelerate into a higher volatility regime and toppy prices we have become accustomed to in the last four years.
A reminder then that once we see these numbers we are in the danger zone of inflation, consequent demand destruction, government intervention and OPEC policy, all with a derivative market gaining enthusiasm and overexcitement.
Right now, it is roll-up trades in crude, like buying month two and three contracts and holding up to pricing, buying Brent and WTI flies and riding out volatility as it comes and goes. And given the expected market conditions, you could just be long volatility as well. That’s buying OTM calls, which are still relatively cheap given the calming of the geopolitical tensions and an investor/financial market seemingly unaware of the impending storm…
