Thirty-six years after the movie ‘The Blues Brothers’ opened in Chicago, and the black gold brothers of Brent and WTI are looking melancholic once more. As Brexit fears cause both uncertainty and a flight to the safety of the U.S. dollar, crude shuffles lower for a sixth consecutive day. Hark, here are five things to consider in oil markets today.
1) Asian refiners have gorged themselves in Q1 on cheap crude, boosting operations to take advantage of encouraging economics via strong gasoline demand. Unfortunately, their voracious appetite has now left the Asian product market bloated, and a surplus of fuel is weighing on refining margins. As the chart below illustrates, margins have dropped in April – and are now a third lower on average than those seen in the previous six months.
Fuel inventories in Singapore are up to a record of 52.1 million barrels, according to a unit of Singapore’s Trade and Industry Ministry. Given ample supplies, refinery margins are expected to weaken further in the coming months – likely causing refiners to dial back on runs.
2) Digging into the catalyst of the above surge in products, the chart below of our ClipperData shows the year-over-year change in Asian oil imports. The key takeaway is that imports continue to rise into the region, driven on by higher demand.
Imports into Asia are up an average of 1.1 million barrels per day through May compared to year-ago levels, led by strength East Asia (think: China, South Korea). January’s negative print was due to a significant drop in Chinese imports – before they returned to form in February. India has led import strength for South Asia (although weakness last month dragged imports into negative territory year-on-year). Southeast Asia has added modest gains for the most part in the last year or so – with Singapore dominating imports for that region.
3) The return in Iranian production has been truly impressive. According to Bloomberg, Iran has increased output by 730,000 bpd since the beginning of the year to over 3.5mn bpd; Iranian oil minister Bijan Zanganeh says production is up to 3.8mn bpd. We can see in our ClipperData that crude loadings from Iran in May were up over 2.5mn bpd, nearly double the average volume seen exported in 2015.
4) On the economic data front, we’ve had tales of retail sales out of the UK, and they ain’t ‘arf bad. In May they were up 0.9% on the prior month, and up 6.0% year-on-year, blowing the doors off estimates. Inflation data out for the Eurozone was again a misnomer, as it remained out of inflationary territory for a fourth consecutive month, down -0.1% YoY.
Across to the U.S., and inflation data was also soft versus expectations; May’s number was up +0.2% versus the prior month, up +1.0% year-on-year. Jobless claims were below consensus, while the regional Philadelphia Fed manufacturing index showed improving conditions for the first month in three (we’ll take what we can get).
5) Despite all the current kerfuffle relating to negative bond yields, a Brexit, and JPY super-strength, a silver lining can always be found. Hence, amid the ongoing uncertainty in global markets, and as oil sells off for a sixth consecutive day, gasoline prices on the national average may be preparing to roll over, falling shy of $2.40/gal.
After rallying 40% from the lows earlier in the year, the weakness in crude prices in combination with increasing gasoline production as we accelerate into driving season means retail prices may well be reaching their peak for the summer period. We hope.