Once again oil is in a bullish mode, and once again non-fundamental factors go a long way toward explaining why: macro-economic data and announcements, equity markets, risk appetite and the dollar.
But is there also an element of fundamental improvement driving the price rise?
As Société Générale’s Michael Wittner writes in the bank’s weekly commodities report, the now-familiar answer to most questions on oil price movements is non-fundamentals: macro-economic outlook, equity markets, risk appetite, and the dollar.
However there is a hint of fundamental signs supporting the rise. Wittner earlier this month described as “impressive” implied demand in China based on the June refinery run and net products import data. And this week, SocGen is adding more bullish fundamental indicators.
First is Japan. Refiners have already cut imports sharply and as a result, stocks of crude oil, residential fuel oil and unfinished products are at five-year lows. He added (our emphasis):
Moreover, for gasoline, gasoil, and jet/kerosene, Japanese stocks are mid-range, and are not contributing to the global overhang, which is mainly in the US and Europe (note the scales for Japanese gasoline and gasoil stocks). The bottom line is that current fundamentals for China and Japan, the two biggest Asian oil demand centers, are solid.
Other signs, such as the relative movement of Brent against Dubai crude, are less clear cut, they write. Opec cuts have tightened medium-heavy sour crude and shut-ins in Nigeria have affected demand for Brent.
But in the end, they say, the best indicator may be coming from the all-important crack spread. Refinery utilisation in the US is still historically low (the EIA estimated 85.8 per cent last week), but not as low as it’s been earlier in the year. But the margin between crude costs and product prices – are improving in the US:
Margins are still poor in Rotterdam, the Med, and Singapore, but US margins have recovered almost back to the 5 year average. At this point, we cannot see any fundamental reason for the recovery in RBOB cracks. However, given the two-month lag in US (and other OECD) demand data, it is possible that gasoline demand, and maybe even overall product demand, is stronger than we think. Final monthly US demand data for May is due out this week, and may provide further clues.
Here is SG’s chart of US margins:
Nothing bullish in crude (FT Alphaville)