Aug 11 / Victor Arduin

Energy Weekly Report - 2023 08 11

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"Since July, oil prices have risen more than 10%, reflecting coordinated action by OPEC+ members who have restricted the supply of the commodity to the world. With higher prices and strong demand, non-cartel producers were given incentives to increase their oil production. "

Refined Products Get Attention Amid Low Inventories and Risks of Outages

  • Inflation data brought relief to the market and boosted oil benchmarks heading towards a 7-week high.
  • American refiners expect a 2H23 with strong gains given the low inventories and high cracks, mainly after the positive data on country’s inflation climbed 0.2% last month.
  • China monthly oil imports dropped from June’s near-record highs to their lowest level since the beginning of the year.
  • OPEC+ supply restriction keeps providing fundamentals for oil prices to rise further this year, but oil demand for 2024 remains challenging under perspective of a recession in the U.S.


Despite being exposed to some level of volatility by weak crude imports from China in July, the main oil benchmarks showed a recovery during the week, mainly after the U.S. inflation data gave positive signals that Fed could not need to raise borrowing costs in the rest of 2023.

Risks from weather events are growing as high temperatures in the Atlantic Ocean provide a breeding ground for hurricanes, which may potentially damage refining facilities on the U.S. Gulf Coast. Given this scenario, hedge funds are positioning themselves as bullish for RBOB.

Meanwhile, the decrease in inventories reaches other refined products such as distillates, which registered a drop of approximately 1.71 million barrels in the week ended August 4th. In the case that economic activity expands further than expected, diesel will be highly demanded.

Image 1: Finished Motor Gasoline Production (M bpd)

Source: Refinitiv

Image 2: Heating Oil (Dólares per Gallon)

Source: Refinitiv

Fundamentals Support Oil

The commodities were significantly impacted by the restrictive monetary policy initiated in 2022. With the inflationary scenario at more comfortable levels, at least in the USA, they rapidly appreciated in the face of expectations of the devaluation of the dollar, making it cheaper for holders of other currencies to purchase goods in global markets. The month of July showed this dynamic with the Bloomberg Commodity Index rising by over 5%, while the DXY fell by about 1%.

Furthermore, about 30% of the index is composed of energy commodities, which saw an even more significant increase, exceeding 14%, last month. The benign scenario for commodities in general, WTI and Brent benefit from coordinated actions by OPEC+ that have been restricting the supply of oil worldwide. Even if FOMC members declare a more hawkish stance in the coming weeks, bringing some volatility to the market, it is unlikely to profoundly shake the oil prices, which are heading for another week of gains.

Image 3: Bloomberg Commodity vs DXY

Source: Bloomberg

Intense heat in the U.S. has disrupted refineries across the country, recording their lowest gasoline output in 10 weeks in mid-July. Since then, the product production has increased, but it’s under risk of further outages as the chances of a hurricane hitting the Gulf Coast are growing over record temperatures in the Atlantic Ocean, a region that encompasses a large part of the country’s oil and gas production and refining structure.

Therefore, oil hedge funds are taking bullish positions for the NYMEX RBOB. Money Managers’ are holding the highest net long position level since late February 2022, and on a seasonal basis the position is at a three-year high. Gasoline futures have seen a strong uptrend this year, increasing around 14% in 2023, more than oil which rose 2%. Margins have benefited greatly amid supply constraints, reaching one-year highs of around $40 a barrel this month.

Image 4: Net Position RBOB Money Managers

Source: EIA, Refinitiv

Better Perspective for Distillates in the 2H23

Meanwhile, inflation data coming from U.S. showed that prices increased by 0.2% last month. The result brings more confidence that Fed will not need to raise the borrowing costs this year, and could start rate cuts in the first quarter of 2024. It is increasing the optimism for a soft-landing in US with prices declining and resilient labor market in the country. Energy commodities are highly correlated with gross domestic product (GDP). The improvement in the general conditions of American economy is a bullish signal for gasoline and diesel.

Despite distillate stocks being higher than in 2022, they are still at historic low levels. Outside the range from 2019 to 2015, the period before the pandemic. Fuel is used in road freight, manufacturing, construction, agriculture, and other business activities, so its consumption is very sensitive to the economic cycle. If the US economy continues to show signs of strength and can carry out a “soft landing” as planned by the Fed, diesel consumption should grow in the second half, the same period that the demand for heating oil increases.

Image 5: Distillate Stock (M bbl)

Source: Refinitiv

In Summary

The main oil benchmarks have shown consistent gains in recent weeks, in which fundamentals supported by supply restrictions have overcome bearish data such as the drop in Chinese oil imports. While the US shows resilience in its economy and gives signs of a “soft landing”, Brent and WTI should remain steady above U$ 80.00.

Refineries are taking advantage of high refined cracks amid sustained demand growth and low inventory levels. With the end of the driving season in the US approaching, middle distillates should start to drive margins for the sector in 2H23.
Oil demand is expected to reach 102.2 million bpd this year, with China accounting for more than 70% of growth. However, between the increase in oil benchmark prices and weak economic data coming from the country, current demand estimates may suffer a reduction

Weekly Report — Energy

Written by Victor Arduin
Reviewed by Natália Gandolphi


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