CEO REVIEW
April was met with a firm brick ceiling of selling, driven by a macro response to an untenable treasury situation as well as de-escalation of tensions that financial money sees very arbitrarily, i.e. either Max Long or get the hell out. However, the derisking we saw in the outright Brent flat price was just as prevalent in diesel cracks, which were in line with the rest of the macro move. We believe this was exacerbated by trade houses positioning long to the point of max pressure and thus stop out which led to an overcorrection and gasoil spreads in contango. It proved to be too much too soon for the oil market, whereby the rallies we have seen up to this point across the wider market were really based on summer speculative interest as proven by our positioning tools, which created a momentum in the front of the curve. To be fair, all year crude has been strong and largely lived up to bullish sentiment. It was therefore logical to believe that the market could jump-start earlier, however in the last four years, Q2 just hasn’t had the follow through strength that Q3 has had, so we shouldn’t be that surprised.
If we turn our attention to Q3 risk, given its proximity to the prompt, we should begin to see indications of summer strength on the physical pretty soon. Getting overexcited about a bearish move right now would be fighting against the forward physical backdrop, if the general consensus supply and demand models are to be believed. Now that the derisking, stop outs and general low buy side hedging has materialised in a general downward move, we are in a great position to follow through in summer contracts. Margins you may say, and yes the diesel selloff killed the leading justification to be bullish crude structure. But this is lead-lag and possibly a crowded trade, so now both systematic signals and market positioning are more balanced, which is a good thing for those hoping for orderly moves when the next wave of flow comes in.
The most underlooked area is China (shockingly), which we think will next lead the narrative. China has bought a lot in propane and petchems markets – great evidence of a macro shift in China that had been so bearish earlier this year. Naphtha is finding real support here too, so a lot of support for the light end of the barrel, which could be the shock factor for bears. With the Chinese back in the game, we all know how powerful that can be given the sheer volume they can shift in such a short time, and their track record, especially when flat price is deemed “low”. There is nothing like bargain hunting in this oil market, for which Iranian and Russian oil provides the dream scenario.
So if I may use an F1 analogy, Q2 is providing the slipstream and giving way to Q3 risk to lead the pack now – like Perez for Verstappen. But just so this isn’t too one way, we must acknowledge other factors. One, many expectations of summer strength are based on a repeat of refinery fires and outages. There is talk of the most unpredictable hurricane season in decades. If these don’t happen, we will weigh on the physical premium side quite significantly. Two, OPEC remains a wildcard. It may looks very unlikely they won’t extend their cuts to rough out summer, a strategic shift would hurt as there would be a lot of rushing for the exit doors.
