Oct 31 / Victor Arduin

Energy Weekly Report - 2023 10 27

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"With the end of the driving season, demand is expected to shift from gasoline to distillates, such as diesel and heating oil, as consumption of these fuels increases during the winter season."

Gasoline was the main highlight of the energy sector in 2023, but now the focus shifts to distillates

  • Gasoline had a very bullish year, being the most appreciated energy commodity throughout the year. However, demand is expected to decrease as we move closer to the winter.
  • Lower expectations of an escalation in the Middle East have been reflected in the market with lower premiums in energy commodities, but the volatility component remains present.
  • Additionally, just one week before the Fed’s meeting, the energy complex is balancing the risk of lower demand due to high interest rates against the fear of an escalation in the Middle East.


As we approach the end of the year, the energy complex has had a rather heterogeneous performance. While natural gas operated quite bearishly throughout the year, liquid fuels such as gasoline have had a strong appreciation.

With the end of the driving season, demand is expected to shift from gasoline to distillates, such as diesel and heating oil, as consumption of these fuels increases during the winter season.

OPEC's actions have not only restricted global oil supplies, but are also forcing refineries to process light sweet crude, which is more difficult to produce distillates from. This is reducing their yield of distillates, while demand for them is increasing.

Image 1: Energy Commodity Performance 2023
(Normalized to December 30, 2022)

Source: Refnitiv

Image 2: Money Manager Net Long Positions in RBOB Futures

Source: CFTC

With the end of the driving season, gasoline demand likely fall

During the initial half of the year, gasoline stood out as the energy product that appreciated the most. High demand for travel and a robust household spending, promoted a bullish environment for this commodity. Nevertheless, as the driving season ended and with no significant risks of disruptions, such as hurricanes, RBOB has experienced a swift decline in value in recent weeks.

While further weakness in gasoline prices seems likely, it's important to note that market volatility can't be entirely ruled out. One significant factor that could potentially disrupt this downward trend is the Israel-Hamas conflict. Iran, the third-largest oil producer in OPEC, may face sanctions from Western nations or respond by blocking the Strait of Hormuz. Such actions could lead to an increase in oil prices, which are a primary cost in gasoline production. Geopolitical events worldwide continue to exert a strong influence on the oil market, potentially causing some fluctuations in the coming months.

Image 3: Gasoline Product Supplied (M bpd)

Source: Refinitiv

The price structure of gasoline contracts has been in contango since early October, and this is likely to continue widening into the coming months, as there is no sign of strong demand in the northern hemisphere that would disrupt typical stock building behaviors, while refiners are expected to increase distillate production to meet diesel and heating oil demand, which is expected to increase during the winter.

Furthermore, If it depends on OPEC+, middle distillates are expected to experience a bullish winter for 23/24. Cuts in production by Saudi Arabia and reduced exports from Russia are expected to limit the supply of heavy oil, which is used in the production of heating oil and diesel fuel. Consequently, refineries will need to rely more on light oil, which yields less diesel.

Image 4: RBOB and Heating Oil 6-Month Spreads (USD/gal)

Source: Refinitiv

Oil prices weaken without further escalation in the Middle East

The geopolitical risks in the Middle East boosted the oil market in the week following the Hamas attack on Israel, with major benchmarks recording gains. However, as expectations of an escalation in the conflict have diminished, oil has been declining in recent days, pressured by concerns of lower demand and anticipation of signals to be given by the Federal Reserve (Fed) in its upcoming meeting.

Inflation remains high in the U.S., despite being significantly better than last year. The battle against high prices is ongoing and could result in two scenarios: higher interest rates for a longer period or even a small recession. Both possibilities have the potential to promote bearish sentiment in the energy complex.

Image 5: Oil Benchmarks (USD/barrel)

Source: Refinitiv

In Summary

With only a few days left until the next Fed meeting on October 31st and November 1st, the market is proceeding cautiously. Expectations are for another maintenance of interest rates at the current level of 5,25%-5,50%. However, even with no changes being expected, the market will anchor itself on the signals that may be given in the speech about future decisions on interest rates.

On the other hand, the geopolitical risks that initially increased the premiums of major oil benchmarks have since subsided, as the likelihood of an escalation in the Israel-Hamas conflict appears to be diminishing, though the risk remains.

High interest rates and a lack of significant supply disruptions are likely to limit support for a gasoline price increase, as concerns about lower consumption prevail in the market. Other refined products, such as diesel and heating oil, may outperform in a tight supply and high demand environment.

Weekly Report — Energy

Written by Victor Arduin
Reviewed by Pedro Schicchi


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