Surely we need to be long, but when?

Commentary summary:

• HOGO price action seems at odds with PADD-3 inventory picture
• E/W diesel still reflects “mini relative glut” in Asia, but should be temporary
• Perhaps the prospect of jet shortages in Europe are overblown but regrades worth buying dips

The general impression I get from the oil market just now is that in physical, we are in something of a downcycle within this insanely bullish situation. When the market starts staring at a 15-20 MBD supply hole, then spreads of all sorts blow out.

But then the nuance arrives, one being that we couldn’t sustain absolute max price pain from the start and maintain it all through the first half of crisis (the latter half being the macro pain part).

We are putting off the worst of the impacts by drawing from inventory of all sorts (SPR, oil on water, commercial inventory) and have shifted some oil from West to East. Those are the rough fundamentals at least, not to start down the path of how volatile price action can be.

Distillate arbs to Asia are shut from the USG, which was one new marginal arb that emerged in March. From Sikka, diesel barrels are still pointing East at least and fairly vehemently so.

LR2 from Sikka to Rotterdam and to the Med is very closed via Cape. So from that narrow perspective Sing 10 E/W is doing enough but not yet as much as it could. We are also just barely keeping the Sikka jet margin to Singapore roughly open, at these E/W and regrade levels.

(Sikka jet arb to Singapore)

I think incrementally the news in Asia is quite positive though relative to earlier expectations. Runs in OECD Asia might well have stabilised or even tick up slightly in May (basing this off crude procurement news, headlines, and market chatter – no explicit data other than historical!).

China is set to export a little more in May and the signal is positive as they may be sensitive to A) strong export margins and B) keeping the regional economy alive.

Whether a China export flood is to come is still very much a question and even the expectations for May levels are still well down y-o-y.

It’s possible then that from the Asia side, this kind of setup is reasonable and E/W needs to do little more very short-term. June and July can of course be a very different story if crude procurement particularly from the West starts to dry up.

Looking at US stocks released today; a 25 million barrel w-o-w draw on crude + core oil stocks. That won’t last long without a price fight.

Over in Europe ICE GO spreads have eased even as paper crude rallied this week.

Runs in Europe might be surprising to the upside this month and may do so next month now that Brent has collapsed and margins are healthy again.

That plus some seasonal demand weakness, price-driven cut-backs from the consumer, access to SPR, might all be contributing.

(Houston-Rotterdam arbs open for diesel)

Or this is naturally high volatility not related to any of the above. But I do think marginally for now we are in a slightly better place vs this time last month when expectations were catastrophic for April already.

But again, it does make sense that over the coming weeks, diesel spreads will have to fly to start really causing demand loss in Europe and also prompting the necessary government action in the West. It’s just an open question whether this will be a May or June story. I am more and more thinking it is a June story globally.

That the HOGO is actually this low even as ICE spreads have declined is of interest and I am not sure it is very justified. Tonight’s EIA data saw more disty draws and the HOGO is rising up from near parity.

PADD-3 might even be more important now than PADD-1 given the unusually high demand for US oil abroad.

HOGO weakness has opened up Hou-Rott MR arbs even as the Singapore leg from Houston has closed, so we might expect bigger flow to Europe in May.

All at the cost of more US inventory, which I think will need soon to price itself marginally out the global market soon enough.

I have been saying this for a week or two and possibly have been a little early (so wrong). More chatter about possible US export limits were denied by US statements yesterday, but both HOGO and TI/Brent have been looking oddly weak.

Lastly, should we be long regrade from here? In Europe and in Asia we’ve had a decent selloff in regrades.

I will stick to the message that US yields are very high and this is keeping US jet stocks stable even as exports have risen.

Europe will be doing the same on yields. These together could do a fair bit of damage to import needs in Europe.

China might export more jet next month too, weakening the Asian regrade perhaps slightly more.

But seasonality is also bullish going forward in Europe and for all the airline announcements of cut capacity, the KBD impact might not be that great. So buying regrade dips might still be good risk/reward at least in the context of this high risk market.

Houston jet arbs to Rotterdam are currently closed for June delivery so that might tell you something about the need for Europe’s regrade to price back open the arb one of the last and largest suppliers.

Whilst Dangote is also a key jet supplier now – it is not the most reliable part of the supply chain.