The chasm between the reality of demand sentiment and the crude oil futures markets, by extension, and the continued relentless buying in the North Sea physical seems to have been driven even wider this fortnight. Oct’24 EFP continues to price relatively weakly on partials, pointing to a squeeze in the physical rather than genuine demand. Fundamentally, margins continue to struggle with product weakness, although the lower flat price lent a touch of support.
This could allow the physical diff to remain elevated as long as the flat price remains weak. State-side, the weakness has been clear, with shoddy macro stats and EIA builds. WTI/Brent boxes have softened from +20c down to single digits showing the tightness in the US relative to Brent easing. There continues to be significant trending buying of Dated in the front, with the physical remaining elevated. The physical diff continues to push to higher levels, reaching 199c yesterday despite the sharp sell-off post window and structure well offered this morning. Buying has been aggressive and spanning the grades of the Brent basket. Vitol initially aggressed the bid side in Midland before Totsa joined in on bidding Midland and Merc bidding Ekofisk, which was setting the physical yesterday.
So what can stop the buying frenzy? As with anything being whipped up it seems its own momentum is driving it, somewhat. One of the original drivers has ejected from the bullish driving seat as Chevron flipped to offering on the 15 Aug and the cargo of Midland was bought up by PetroIneos.
On paper, the flow is becoming more turbulent with greater sell-side interest. Aggressive and hefty buying has gone on without the previously bid major, as a refiner has been aggressively buying size out of 19-23/8. 19-23/8 v Cal Sep was bid up to 240c. Before the spreads, along with many products sold off on 19 Aug, the buying on paper from NOCs from all over Europe, alongside trade houses, chased up the higher prices. We continued to see good buying in the window out of 02-06/Sep with majors and trade houses all buy-side yesterday around 138c. The spreads collapsed yesterday, which has brought a little more confidence to the bears, who have been burned badly recently. The market has taken more than terrible economic data, weak margins, and cut runs to stimy the frenzy. There have been better names on the sell-side since the collapse yesterday as the spreads dumping brought a little more confidence, allowing the rallies in futures to be sold into the Dated market. The pricing spread has seen very little sell-side interest until recently. There have, however, been glimpses of bears as we have seen a bit of trade selling coming in over the past couple of days, despite bal-week remaining strong. With the pricing 19-23 Aug week seemingly seeing uncounterable momentum, the 26-30 Aug CFD then becomes the weak point of the curve as it has seen less aggressive buying than the weeks surrounding it.
It seems like we’re entering a trending market with uncertainty between a strong physical and selling coming in for later weeks in September. Therefore, we’re expecting a futures-led move to either side. Implied physical diffs are looking at a steady decline from $2, to $1.50, $1 down to $0.30/bbl w-o-w, pricing in a steady weakening of the physical market. This may, in fact, lead to more strength as many players have been buying higher up, so we may see them coming out to defend positions. It seems we have found ground with a bottom in the structure. The physical diff is the key here; if this holds regardless of weakening EFP, then we may see strength into expiry, ‘fundamentals’ be damned!
