After a relatively solid weekend, the oil market started the week under pressure. ICE Brent is once again trading below US$89/barrel at the time of writing. Geopolitical risks appear to have eased considerably, removing some of the risk premium built into the market. However, signs of tightening remain in the physical market, with delivery times continuing to strengthen. The June/July Brent spread traded at a high of $1.34/bbl on Friday, after closing in on a discount of US$0.70/bbl at the start of the week. The strength of spreads is aligned with our oil balance which continues to show a deep deficit during the second quarter of the year. The outlook for the second half of the year is less clear and depends on OPEC+ policy.
Easing geopolitical risk in the market pushed speculators to head for the exits. The latest positioning data shows that speculators reduced their net long position in ICE Brent by 39,101 lots to 295,831 lots last Tuesday. This movement was exclusively driven by the liquidation of long positions. The NYMEX WTI saw a similar development, with speculators reducing their net long position from 24,251 lots to 179,646 lots during the reporting week. Positioning in ICE diesel has also been significantly reduced. Speculators reduced their net long positions by 31,589 lots to 49,536 lots – the smallest position held by diesel speculators since January. Middle distillate fundamentals have evolved significantly in recent weeks and the market appears increasingly bearish. Stocks have been building at a good pace and in Europe, diesel stocks in the ARA region increased by 52 kt last week to 2.18 million tonnes, bringing stocks above the five-year average for this period of the year. The ICE prompt diesel spread has been trading in contango since mid-April, while the prompt diesel crack has been trading at its lowest level since June last year.
Even though middle distillate fundamentals are more bearish, risks remain in the market. There were reports this weekend of another Ukrainian drone attack on Russian refining capacity. The Slavyansk oil refinery in Krasnodar was the latest to be attacked, reportedly shutting down its operations. The refinery has a capacity of approximately 1 million b/d.
There’s not much on the energy calendar this week. We may get the latest official Saudi sale prices later this week. On the other hand, there is a lot on the macroeconomic calendar this week, which will also be important for the energy and commodities markets. The Fed will meet on Wednesday, where no change in interest rates is expected, while the April US jobs report will be released on Friday.
