The geopolitical risk premium may have faded, but the continued rally in Brent structure highlights the market’s resilience. Futures spreads have been on a steady upward trend since the beginning of May, with Sep/Oct Brent strongly backwardated above $1/bbl (time of writing). The market has fundamental strength, with strong refinery margins that are a driver of crude demand. Resurgent distillate strength took the market by storm, but something has to give. Product cracks would eventually correct lower on account of higher production. At the same time, hot temperatures across Europe and heat-related disruption would force refiners to cut their run rates, tempering crude demand. Nonetheless, Forties saw buying from Chinese players (Petroineos and Unipec) in the physical window, taking advantage of momentary Dated weakness and Dubai strength to fix arbs into Asia potentially.
However, the physical strength may be capped, with Glencore and Mercuria emerging on the sell side, offering WTI Midland. The front rolls are seeing stronger selling pressure, with the 21-25 July 1-week roll notably falling from $0.50 to $0.30/bbl over the week. The physical differential is implied higher in the upcoming weeks, and without sufficient bullish momentum, the weekly structure is likely to roll down weaker. This rationale informs our trade idea of going short in the 28-01 Aug 3-week roll, which is a proxy for shorting the physical. Interestingly, weakness in the front has synthetically supported the back, with Q4/Q1 DFL up from $0.10 to $0.30/bbl over the fortnight, but the question is if these levels can be sustained.
What to make of this market? It is neither weak, but the bulls also do not have much to be excited about. It will be difficult for the physical bids to hit the curve, yet players are defending their long positions, with scaleback buying seen in the Balmo DFL. OPEC+ hikes are an afterthought, with the narrative being that the announcements formalise existing overproduction. But the fluctuations in Dubai structure may reveal pockets of opportunity, and the Chinese were quick to pounce. But for structure to strengthen, we will need to see something more substantial.
