Home Commodities The Commodities Feed: Middle distillate strength | Article

The Commodities Feed: Middle distillate strength | Article


Despite oil prices edging slightly lower yesterday, ICE Brent remains comfortably above US$80/bbl. And while the prompt Brent time spread weakened yesterday, the general trend this year has been for the spread to move into deeper backwardation, suggesting that the market is tightening. Our balance sheet suggests that we will be seeing marginal tightening, with the market in a relatively small deficit in 1Q24. However, what will be of more interest in the coming weeks is what OPEC+ decide to do with their voluntary supply cuts which expire at the end of March. Our balance sheet suggests that the market will be in surplus in 2Q24 if the group fails to roll over part of these cuts.

The prompt ICE gasoil crack is now trading a little over US$33/bbl on the back of tightness due to Red Sea disruptions and some refinery outages. The European middle distillate market has been plagued by tightness since Russia’s invasion of Ukraine, which has resulted in drastic shifts in energy flows with the EU banning Russian crude oil and refined products. This has left Europe more dependent on Asia and the Middle East for flows, and these flows are being affected by the Houthi attacks in the Red Sea. Middle distillates are likely to remain well supported in the short term as refineries go into maintenance season.

Natural gas markets continue to come under significant pressure. Front-month TTF futures settled a little more than 5% lower yesterday, taking the market below EUR26/MWh. Weather in North West Europe is forecast to be milder than usual over the next week or so, whilst storage remains comfortable at 67% full. With the end of the heating season quickly approaching, downward pressure is likely to persist. Also not helping sentiment will be the weakness seen in the US gas market. Front-month Henry Hub closed almost 4.3% lower yesterday due to forecasts for warmer weather over large parts of the country.

Along with weaker gas prices, the market is also seeing less volatility. As a result, ICE announced yesterday that it will lower initial margins for front-month TTF futures by 19% to EUR8.67/MWh. The changes will be effective from end-of-day Tuesday.

For the energy calendar today, OPEC will release its monthly oil market report, which will include its latest outlook for the market. It will be interesting to see how OPEC views the market ahead of members deciding what to do with their output policy for 2Q24. In last month’s report, OPEC estimated that demand for its oil in 2024 would be 28.5m b/d, which is quite a bit higher than the 26.6m b/d the group is estimated to have produced in January. However, OPEC is estimating that oil demand will grow by 2.25m b/d this year, which does seem fairly aggressive.

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