In January, we saw a very bullish market, with genuine supply tightness, and what we ended up with was a market that jumped the gun, and got too short too soon ahead of maintenance. This strategic misstep led to an explosive physical market as players scrambled to cover shorts. It’s like déjà vu, but it seems we skipped the learning curve, opting instead for a bold leap into overconfidence. The signals were all there – robust margins, OPEC steadfast in its production cuts – yet, here we stand, witnessing a downturn in the physical market, following our last tête-à-tête.
Margins? Sure, they took a hit, but not enough to justify the dramatic plunge. The real turning point came when we started seeing cargos going offered in the window and we saw levels start to tick lower. We caught a glimpse of a trade house trying to don the bull cape for the 4-8 April but this barely caused a ripple, let alone lift the partials. Having loaded up on length, two refiners were seen offering Midland and Forties, likely unwinding their hedges and spooking an overly saturated long market into unwinding their length, with the curve pushed down in low liquidity.
Come Friday, we were teetering on the edge, with the physical almost dipping into the red zone, but cargo offers for 13-17 April got lifted at 130c on a CIF basis and prevented this, though Monday rolled around with no offers seen in the physical, highlighting the clear tentativeness in the market. WTI Midland differentials are getting offered so low they can’t even sell high into the cash because nobody is buying. Further supporting the move lower, TD3C freight rates roofed making transits far too expensive for Asia to take US crude and are pulling light sour as an alternative.
This backdrop of a weakening physical market has led to a significant unwinding of long positions in paper, with the balmo segment shedding value, albeit on pretty thin liquidity, which exacerbated the move lower. Weakness in prompt April rolls and backend April and May rolls from hedge buying flows tapered off last week and right now there’s a palpable sense of anticipation for a bullish turnaround.
The refining margins are not just healthy; they’re thriving, with EBOB reaching new heights and gasoil setting higher lows. The significant draw at Cushing, paired with tightening in the Eastern market, hints at a shift back to bullish sentiment.
It seems it is a handful of lingering cargos that are anchoring the physical to their current lows. Flat price has broken out and looking at yearly highs, spreads that had come off a lot on the back of Dated weakness have started to move higher and it feels like the heavy selling is done now and we are on the cusp of a breakout. Once these cheap cargos are taken out, we expect the floodgates will open.
