Another day, another muppet bites the dust.
Brent pressured as European and Chinese concerns resurface
Despite recent price action, current fundamental data looks tight
After rebounding $2/bbl on Tuesday, Brent sold off again over the past two days and closed at 103.11 as of Friday, the lowest level in 9 months. By the time of writing, Brent is down a further $2.00/bbl overnight on the back of disappointing Chinese activity data. This suggests that in the tug of war between tight global fundamentals and the negative sentiment created by weak European product markets and fears of further Chinese slowdown, the latter currently prevail. These concerns have weighed on the market even as global inventory data for the end of March remains close to last year’s low levels, suggesting that the market remains quite tight.
But product prices tell another story
Nevertheless, product cracks, and particularly European product cracks, have come under significant pressure, raising concerns that European demand is weaker than expected, which in turn pulled Brent prices lower. However, in our view, the weakness in European product cracks does not necessarily reflect deteriorating economic activity. In our view, the weakness in margins is likely the result of the normal seasonal trough in demand, combined with a growing overhang in European refinery capacity and strong competition for exports from US refiners and petrochemical producers. Therefore given our economists forecast for global growth, we expect that global petroleum inventories will follow roughly last year’s path, which suggest that the global oil market should remain quite tight.
Short term downside risk increase
We will not get clarity on whether this weakness in European demand is indeed just seasonal or whether it reflects something more lasting for another two months. In the meantime, European margins could suffer further as the European refinery turnaround season has peaked and more and more refineries are coming back from maintenance. This could put further downward pressure on Brent prices, which could be exacerbated when the large crude inventory overhang in the US Midwest will is shifted to the US gulf Coast beginning in May. Consequently, we see some increasing short term risk to our trading recommendation to hold a long Brent crude GSCI position. We therefore close this position with a loss of 15.48% but will re-evaluate the opportunities once we get more clarity on the state of European demand.
And yes, for every muppet that bought from Goldman, Goldman sold to said muppet. Don't worry though, Goldman will crush it on its short Goldman call. Crush it.