First Thoughts Of The Oil Barrel In Q2

A bearish set of APIs dictated the relative underperformance of distillate vs crude oil this morning. The more eye catching data from APIs were probably the implied demand numbers for me. While distillate stocks built, distillate implied demand is falling off rapidly and if DOE stats were to mirror APIs, middle distillate crack spreads will fall hard and fast in the prompt months.

However, refineries are responding to the supply dynamics of middle distillate, as represented by both run cuts in general, and lowering the yield on distillates. The lower yield will probably slow down stock builds in middle distillate, given we are entering into seasonal stock building period for distillates.

On the other hand, Gasoline has been very quiet. There hasn’t been any clear pattern yet for whether we have a demand/supply imbalance for the driving season which officially starts today. Refineries are not tweaking yield much in that part of the barrel and SFOT guess they are all taking a wait and see approach given the dramatic collapse in Gasoline crack last year.

API Distillate demand

Distillate yield

Gasoline yield

After a recent dip, fuel oil cracks have recovered. This would probably have to do with flat price lower as well as refiners using more straight runs fuel, creating organic demand for the heavy end. This is contributing to refining margins looking very healthy again, on paper at least and probably a direct result of the run cuts and maintenance going through.

Now that we enter Q2, we should begin to see volume pick up in the oil markets after a drop over the last 2 weeks but SFOT suspect intraday volatility to remain high as financial markets keep pushing the market about.

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