Barrel Counting
In light of the fast-changing nature of market forces due to factors such as geopolitics (Iran) and US production, traditional global supply and demand models do not accurately reflect the nature of the dynamics of the oil market. We believe that the primary driver of price is physical trade and whether the marginal global barrel is finding a buyer.
Atlantic Basin Physical Crude Differentials
Near-term price indicators include spot pricing differentials across North Sea and Nigerian crudes, the world’s marginal barrels, as they tend to be the first to reflect a loosening or tightening of global fundamentals and they have weakened of late.
US Crude Exports
Given the recent dearth of physical buyers, increased US exports would likely result more from a US push than European demand. Since the late-June record crude exports, fixtures and loadings in the US Gulf have been weak. After a recent investor tour of Corpus Christi, we believe that lack of storage logistics may result in regional bottlenecks in the Gulf Coast. Elsewhere, the closure of the Philadelphia refinery following a recent fire as bearish for crude but a potential temporary release valve for a saturated global gasoline market.
Chinese Refined Product Exports
After Asia built a considerable amount of refining capacity over recent years, refining margins are weak, raising questions about over-capacity. It’s also worth noting that Chinese gasoline and distillate exports are near all-time highs. As for Chinese Crude Oil Imports, which Iran and Venezuela historically comprised nearly 10% of recent stockpiling suggests this was for energy security purposes. Funding peak demand season by destocking rather than importing quickly could create transient pockets of oversupply. Meanwhile, even with lower exports, the Saudi Arabia is gaining market share where it matters after increasing shipments to China by 339 kb/d, capturing more than 45% of the world’s fastest import growth market.
