TOCOM Energy

Crude oil prices have been under strong downwards pressure for the past week, largely on concerns that the rate policy would cap demand growth going forward, while signs of seasonal demand slowdown accelerated the losses.Prices spiked higher in the wake of a massive Hamas attack on Israel Monday morning, there will be some risk premium factored in until the market is satisfied that the event is not setting off a chain reaction. Front-month Dec JPX Dubai futures were trading at $84.3/b, Intermonth spread were largely tracing the direction of flat prices where prompt month and third month spread was seen last traded at $2.5/b.

With an uncertain picture on oil demand, traders are searching for any clearer clues on where the market is headed.Fears of recession are showing up again where the first clue comes from fixed-income markets, investors are betting that the risk of a recession is rising as the economy absorbs a supply shock in the commodity and energy markets and as central banks keep high interest rates for longer.

For the past year, medium- and longer-term rates haven’t risen nearly as much as the short-term rate controlled by the Fed, leading to a so called inverted yield curve. Historically, an inverted yield curve has been viewed as an indicator of a pending economic recession.That has changed in recent weeks, with longer-term rates which influences rates for mortgages and other loans rising faster, pushing the yield curve from negative towards positive territory. This particular run-up is mainly driven by a rise in real interest rates which is because investors consider it riskier to hold government debt for the long run when the economy appears uncertain. It could also be contributed to the Treasury Department’s is auctioning off more debt to cover the government’s swelling budget deficit. For whatever reason, it could mean that much of borrowing cost that affects the economic activity start to bite across more corners of the economy than they have to date.

What further dampened sentiment is that the selloff in crude market had proved not enough to prevent losses in oil product cracks. The drop was unusual considering heavy seasonal refinery maintenance curtailing fuel production. For most of this year, oil refineries have been making huge profits from both gasoline and diesel, the industry’s two mainstay products. Now the outlook for refiners is deteriorating with gasoline profits collapsing and diesel margins inching lower, with further declines likely to crimp crude intake.

It seems that the decline in US implied gasoline consumption was one of several bearish forces that came to the fore last week. EIA report shows that US gasoline stockpiles exceeded five-year seasonal norms for the first time in 2023 tracking a 7% slide in implied US gasoline demand over the period to an eight-month low of 8 million bpd , while four week average of gasoline demand at lowest seasonals in 26 years. Asian gasoline markets have also been under pressure as cracks slumped on the Atlantic Basin.The weakness in gasoline has fed through to weaker refinery margins, Singapore gross refining margin complex dropped sharply to $4.8/bbl last week while margins for cracking units where most gasoline are produced once turned negative. Diesel’s premium over crude also fell to the lowest since July, in part as Russia lifted an export ban for its oil producers, but margins still remain well above seasonal norms.

With the tendency to ramp up utilization and maximize diesel production, tightness in the diesel might be mitigated, while gasoline may face further downward pressure in the absence of seasonal demand support. Looking ahead, as refining margins come off their highs, the first quarter of 2024 is projected by some to be the heaviest maintenance season ever, loaded with deferred work and regularly scheduled turnarounds.