Physical differentials peaked at $1.10/bbl on 11 July, before slowly grinding lower to $0.88/bbl by 22 July. The complex found support on stronger WTI structure which was kept Midland grades stateside.
The key theme in the CFDs have been trade houses on the sell-side against refiners on the buy side. Structure peaked on 19 July before coming off following an offered physical on 22 July. In line with this, the Aug DFL rallied to highs of $1.30/bbl before falling to $0.80/bbl.
Deferred European refinery margins experienced fluctuations, initially dropping to the low-$4/bbl region. They subsequently ticked up slightly and then experienced a steady decline, however a sharp uptick on 22 July kept both the Q4’24 and Q1’25 margins around $4.30/bbl levels.
Open interest (OI) for September Brent futures saw a significant decline from 446.6mb to 391.8mb between the 10th and 14th trading days (-12.3%). Despite the decline, OI for September was still relatively higher compared to August, increasing from +8% to +24% above August’s OI during the same period.
What goes up, must come down, and it really feels like we have reached an inflection point in Dated Brent, or inflexion point as the Americans spell it. As usual, it is all eyes on America, and what the changing political tides will mean for the oil market, geopolitics, and the financial markets at large. But that is a discussion reserved for Q4. The Dated Brent market is all about the here and now, and that is what we will focus on. US crude has been extremely well-supported ahead of WTI’s expiry, with tightness around the Cushing delivery point and Canadian wildfires threatening disruption to oil supply. WTI futures spreads roared higher, giving traders and analysts flashbacks of September 2023. This has served to keep Midland barrels stateside, and Chevron was a huge buyside aggressor in the paper and physical.
There is no contradiction. The weakness in product margins can indeed be attributed to strength in Dated Brent. Combining, strong backwardation, high refinery run rates, and unusually low unplanned refinery outages for this time of the year (according to the IIR) have led to an adequately supplied market in gasoline and diesel, and hence downwards pressure in cracks. But something has to give, as weaker margins and high Dated differentials threaten to put refiners into run cut territory. This backwardation is difficult to sustain, and we think the physical differential has been maxed out at $1.10/bbl. Since 19 July, the market has begun trending to the downside. The physical was pressured down to $0.88/bbl on Monday, and Tuesday saw further bearish flows. We think this trend is likely to continue.
The macroeconomic picture does not look rosy. Especially for the world’s two largest economies in the US and China. The People’s Bank of China (PBoC) has cut several major interest rates. Markets are widely expecting the Fed to follow through in September. Weakness is really pronounced in gasoline and diesel. Given the generally poor liquidity and weak demand, we think that only reports of catastrophic weather events, including hurricanes, flooding, and wildfires can provide a bullish impetus.
So where do we go from now? All The Way Down. The bearish whirlpool may have already arrived, and structure have been pressured in the last few trading days. Trade houses have been on the sell-side of structure, with only refiners on the buyside. The market has seen an exceptionally herdy trading mentality this year, and recent events may signal the beginning of another similar pattern that traders are all too familiar with. As such, we think going short in the 5-9 Aug vs Cal Aug presents good risk-reward to express our bearish thesis.
