27/06/2022 11:45 No change, all change - Energy Aspects

Pe rspe ctive s (Crude oil) | 27 Jun 2022

No change, all change

Analysts

London | Amrita Sen, Paul Youdell, Chris Corda, Jane Rangel

Daniel Schwartz

Additional downloads

Balances Pack

Macro sell-off amid recession fears, worries about Iran’s return, producer hedging and low liquidity all

headwinds for crude near term.

But physical markets still strong, with cash crudes soaring; naphtha flips into backwardation as crackers

return, China slowly reopens.

Iran nuclear talks set to resume, but there has not been a breakthrough on issue that stalled them before.

Consumer balance sheets much healthier than in 2007–08; products cracks, margins barely budge under

macro malaise and reflect fundamentals.

Speculative long positions shrinking in crude but elevated in products; strong margins will limit the downside

to crude.

Fig 1: Ch in a in frastru c tu re in vestmen t an d retail sales, y/y, % Fig 2: Bren t volatility smile, %

Infrastructure investment YTD y/y% Retail sales y/y% 44

15 42
10
40
5

0 38
(5)
36
(10)

(15) 34
May 21 Aug 21 Nov 21 Feb 22 May 22 10DP 25DP 50D 25DC 10DC

So urc e: Na t i o na l Burea u o f St a t i st i c s o f Chi na , Energy A spec t s So urc e: Bl o o m berg, Energy A spec t s

Crude markets h ave taken a sh el l ac ki ng, droppi ng by over $10 per barrel i n two weeks, and i ntra-day swi ngs remai n

eye-wateri ng. M ac ro h eadwi nds wi l l c onti nue to buffet c rude as fears th at c entral banks around th e worl d wi l l h ave

to push th e gl obal ec onomy i nto rec essi on to c ontrol i nfl ati on are l oomi ng l arge. At th e same ti me, h eadl i nes about

th e EU persuadi ng Iran and th e U S to resume th e stal l ed nuc l ear tal ks wi l l add to market j i tters even th ough th ere h as

been no breakth rough on th e key i ssue of IRGC sanc ti ons. Al l of th i s i s oc c urri ng ami d seasonal l y th i n l i qui di ty due to

traders bei ng on summer h ol i days, wh i l e soverei gn produc er h edgi ng, wh i c h al so tends to oc c ur duri ng th e summer

l ul l , h as begun. Th e el evated put skew i s a real -ti me i ndi c ator of soverei gn h edgi ng.

Togeth er wi th momentum traders (CTAs) sel l i ng out of th ei r l ong posi ti ons as pri c es fai l ed to push th rough key

tec h ni c al l evel s, th e i ngredi ents for a near-term bear market are al l i n pl ac e. But underl yi ng fundamental s h ave not

c h anged dramati c al l y despi te our bal anc es weakeni ng m/m, as most of th e stoc kbui l ds i n Q 2 22 were i n Ch i na and

Russi a, not at pri c i ng c entres. O ur bal anc es sti l l sh ow materi al c rude draws th i s summer (-0.6 mb/d), even wi th

rec ord SPR drawdowns, wh i l e demand h as not yet sh own any meani ngful si gns of sl owi ng down.

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27/06/2022 11:45 No change, all change - Energy Aspects

We have raised our Russian production estim ates as

Fig 3: WTI ($/bbl) an d XLE ($, R HS)

dom estic dem and is faring m uch better than

expected, al l owi ng th e c ountry to rai se refi nery runs

and th erefore unl oc ki ng produc ti on. Wh i l e our sourc es

c onfi rm th at th e rec ent esti mate of Russi an c rude and

c ondensate produc ti on put out by seni or offi c i al s i s

i nfl ated as i t now i nc l udes NGL s, th ey do see output

c l i mbi ng bac k to 10 mb/d i n August as domesti c runs

pi c k up after mai ntenanc e. But h i gh er produc ti on i s

l argel y offset by h i gh er runs, meani ng th e net c h ange to

c rude bal anc es i s mi ni mal .

O veral l , ph ysi c al c rude and produc ts markets are sti l l

strong. Indeed, c ash c rude di fferenti al s soared l ast week

So urc e: Bl o o m berg, Energy A spec t s

—wi th M urban, for i nstanc e, j umpi ng to a rec ord

h i gh . So, wh i l e th e fl at pri c e of c rude c an c onti nue

sel l i ng off i n th e sh ort term, onc e th e mal ai se i s over, i t wi l l present attrac ti ve entry poi nts for posi ti oni ng for l ate

summer/wi nter and 2023. Indeed, at th e c urrent pri c e l evel and forward c urve, th e bal anc es for 2023 are even more

bul l i sh th an we c urrentl y assume. We al ready h ave an ex tremel y c onservati ve vi ew on gl obal oi l demand growth , at

j ust 0.9 mb/d y/y, even wi th Ch i na j ust starti ng to open up, as we assume a U S and European rec essi on. But we see

gl obal l i qui ds stoc ks drawi ng by 0.2 mb/d nex t year. Th e l onger pri c es stay at c urrent l evel s, th e more upsi de th ere

wi l l be to 2023 demand and bal anc es.

The R-word

Th ese days, predi c ti ons of a U S or gl obal rec essi on abound. Th e unusual nature of th e deep Covi d-19-i nduc ed

downturn i n 2020 and th e roari ng rec overy i n 2021, wh en fi sc al and monetary sti mul us fl ooded th e ec onomy, l i mi ts

th e rel evanc e of past epi sodes—even th ough c l i ents are c onstantl y aski ng us wh at previ ous downturn th i s c an be

c ompared to. We argue th at th e answer i s none.

In th e U S, a strong l abour market wi th sh arp, upward

Fig 4: US h ou seh old debt ou tstan din g, % total assets

wage pressure means th at overal l c onsumer spendi ng

may buc kl e but i s unl i kel y to break even as th e 20

unempl oyment rate dri fts h i gh er. Consumer bal anc e
19
18
sh eets are muc h h eal th i er th an i n 2007–08, wi th debt
17
outstandi ng as a perc entage of total h ouseh ol d assets
16
h al f th e l evel i t was at th e ti me of th e gl obal fi nanc i al 15
14
c ri si s. Househ ol d debt servi c e repayments at 9% of
13
di sposabl e i nc omes are at th ei r l owest si nc e 1980,
12
wh i l e ex c ess U S h ouseh ol d ex c ess savi ngs of about $2 11
tri l l i on c onsti tute 9% of U S GDP.
10
90 93 96 99 02 05 08 11 14 17 20

Th ese pandemi c -era gai ns are c ertai nl y unevenl y

di stri buted. Th e i nc ome subsi di es and transfers to l ower

So urc e: Federa l Reserv e, Energy A spec t s

earners duri ng th e pandemi c h ave l argel y been spent,

and we h ave previ ousl y noted th at rapi d growth i n c onsumer c redi t refl ec ts th e di ffi c ul ty th i s c oh ort i s h avi ng

keepi ng up wi th ri si ng food and energy c osts.

Yet a fi nanc i al c ri si s i s unl i kel y even among l ower-i nc ome h ouseh ol ds fac i ng ri si ng debt burdens. For th e bottom 90%

of th e ec onomy, mortgages domi nate l i abi l i ti es, ac c ounti ng for rough l y two-th i rds of al l debt. Si nc e th e i nterest rate

on th at debt wi l l l argel y be fi x ed i t wi l l take a bi g, sustai ned i nc reases i n market i nterest rates to move th e debt

servi c e rati o to muc h above 10% (wh i c h was th e average between 2011–19 and c ompares to over 12% between

2000–08).

L i kewi se, th e h ousi ng sec tor may be sl owi ng, but th i s i s bec ause too muc h demand i s c h asi ng too l i ttl e i nventory

after 15 years of underi nvestment i n th e sec tor. At l ower pri c e poi nts, demand ex i sts for new h omes and so a sh arp

dec l i ne i n h ome pri c es seems unl i kel y. M eanwh i l e, i n th e c orporate sec tor, th e resh ori ng of produc ti ve c apac i ty th at

began duri ng th e U S–Ch i na trade war ki c ked i nto h i gh er gear fol l owi ng th e suppl y-c h ai n di saster of th e past two

years, wh i c h means th at c orporate i nvestment i s l i kel y to be l ess sensi ti ve to ti gh ter fi nanc i al c ondi ti ons th an i n past

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27/06/2022 11:45 No change, all change - Energy Aspects

c yc l es.

Fig 5: US h ou seh old debt servic e ratio, %

14 M eanwh i l e, i n Ch i na, Bei j i ng’s i nfrastruc ture spendi ng i s

boomi ng despi te weakness i n c onsumer spendi ng, wi th

13
growi ng pressure on l oc al governments to start maki ng

12
as muc h of th ei r nearl y 5 tri l l i on yuan i n potenti al

11 i nvestment for 2022 by August. Th i s spendi ng i s al ready

boosti ng di esel demand, l i mi ti ng ex ports.

10

9
We referred th ose vi ewi ng naph th a and L PG weakness

8 as a si gn of an i mmi nent gl obal rec essi on to l ast week’s

90 93 96 99 02 05 08 11 14 17 20
P er s pectives . Th e weakness i n petroc h emi c al

feedstoc ks i s predomi nantl y a func ti on of severely

snarled dom estic and export logistics i n Ch i na due to

So urc e: Federa l Reserv e, Energy A spec t s

Covi d restri c ti ons th at h ave resul ted i n l ower operati ng

Fig 6: Ch in a May ac tivity, y/y %

rates at Asi an petroc h emi c al pl ants. Ch i nese demand i s

not weak; i t h as been trapped. Fac tori es were sh ut May-22 Q1-22 2019
bec ause workers c oul dn’t get to th em, but th ey are

sl owl y re-openi ng now. Consumers—parti c ul arl y i n th e

Industrial value-added
most popul ous, h i gh er-i nc ome metropol i ses—h aven’t

been abl e to buy goods as th ey h ave barel y l eft th ei r

h omes. L ooser restri c ti ons from th e fi rst week of June

meant th at al l i ndustri al fi rms i n Sh angh ai h ave

Services

effec ti vel y reopened, so green sh oots are appeari ng for

petroc h emi c al demand. It i s perh aps no c oi nc i denc e

th at naph th a c rac ks are off th ei r l ows and European

Retail sales
naph th a h as now moved i nto bac kwardati on.

Huge slowdown in demand baked into

Fixed-asset investment
balances

It i s al so noteworth y th at gasol i ne and di sti l l ate c rac ks

remai n supported i n al l benc h mark regi ons and

Infrastructure
c onti nue to trade near al l -ti me h i gh s, even wi th over 3 investment
mb/d of refi ni ng c apac i ty gl obal l y returni ng between

M ay and Jul y. We see l i mi ted respi te for sky-h i gh refi ni ng

margi ns unl ess demand c rash es, wh i c h we do not

Floor space sold
ex pec t.

−20 −15 −10 −5 0 5 1

For sure, th e Fed’s sl ow reac ti on to l ast year’s ri si ng

i nfl ati on i s now th e worl d’s probl em. Even th ough th e

So urc e: Na t i o na l Burea u o f St a t i st i c s, Energy A spec t s

i nfl ati on oversh oot i s more pronounc ed i n th e U S, th e

c h ange i n th e Fed’s reac ti on func ti on h as put

unrel enti ng downward pressure on most oth er c urrenc i es, h al fway th rough a year th at began wi th a c onsensus

ex pec ti ng an ex pensi ve dol l ar to deprec i ate. Th i s c urrenc y weakness i s not th e sort of deprec i ati on th at enh anc es

c ompeti ti on and i s often wel c omed tac i tl y or ex pl i c i tl y by pol i c ymakers. Instead, i t i s addi ng to th e al ready

c onsi derabl e i nfl ati onary pressure ex erted by h i gh c ommodi ty pri c es and i s strai ni ng food and energy i mporters th at

were j ust begi nni ng a tentati ve rec overy from th e effec ts of th e pandemi c .

But, as noted above, we h ave al ready baked a si gni fi c ant sl owdown i n demand growth i nto our bal anc es (H1 22 at

3.7 mb/d sl ows to 1.2 mb/d i n H2 22, wi th 2023 sl owi ng furth er to j ust 0.9 mb/d). O ur demand forec asts are

al ready fac tori ng i n a far worse ec onomi c outl ook (wi th th e U S at -0.5% and Europe at -1.5% vs c onsensus forec asts

for 1.7% and 1.9% growth , respec ti vel y) th an even th e most beari sh GDP ex pec tati ons publ i sh ed by banks. If

anyth i ng, th ere i s upsi de ri sk to our demand fi gures based on th e pac e of Ch i na’s rec overy and th e ri ppl e effec ts i t

c oul d h ave on th e gl obal ec onomy by easi ng suppl y c h ai n sh ortages.

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27/06/2022 11:45 No change, all change - Energy Aspects

Equal l y, th ere i s upsi de to refi ni ng margi ns from th e

Fig 7: Avg. mon th ly pric es versu s In dian c ru de basket,

el evated ri sk of unpl anned outages th i s summer (al ready
$/bbl

vi si bl e i n th e U S and Asi a) as wel l as th e possi bi l i ty

92 Ron SG 10ppm diesel MEG demand outperforms. Refi neri es h ave been runni ng at

Est. domestic gasoline base price Est. domestic diesel base pric h i gh uti l i sati on rates wh i l e ambi ent temperatures are

55 neari ng rec ord l evel s, stressi ng both power gri ds and

45
refi nery uni ts.

35
25
15 Th e Wh i te House i s getti ng restl ess ami d ri si ng pump

5 pri c es th i s c l ose to th e November mi dterm el ec ti ons.

(5)
Th e admi ni strati on i s aware th at refi nery runs c oul d be
(15)
severel y affec ted by wh at forec asters ex pec t to be a
Jan 21 Apr 21 Jul 21 Oct 21 Jan 22 Apr 22
stronger-th an-normal Atl anti c h urri c ane season, l eavi ng

PADD 1 suppl y ex posed. Th e Wh i te House th erefore

So urc e: PPA C, A rgus Medi a Gro up, Energy A spec t s

wants to rai se PADD 1 di esel stoc ks to 90% of storage

c apac i ty (rough l y 70 mb), wi th temporary l i mi ts on

ex ports under c onsi derati on. We bel i eve th i s wi l l bac kfi re, as any restri c ti ons on ex ports wi l l si mpl y l ead to PADD 3

run c uts.

Indi a i s on a si mi l ar path , wi th th e government ex pandi ng i ts uni versal servi c e obl i gati on, forc i ng pri vate refi ners to

rai se domesti c suppl i es fol l owi ng fuel sh ortages i n several c i ti es. Wh i l e U S pol i c y i s sti l l i n fl ux , th ere i s genui ne ri sk of

l ower Indi an di esel and gasol i ne ex ports i n Jul y and August as pri vate refi ners must ensure fuel avai l abi l i ty and

mi ni mum i nventori es at th ei r retai l stati ons. Gasol i ne ex ports c oul d sl ow by 0.1 mb/d q/q wh i l e di esel ex ports c oul d

fal l bel ow 0.6 mb/d i n Jul y.

Products shielded from macro malaise

Th i s di vergenc e between c rude and produc ts pri c e performanc e c an be ex pl ai ned wel l th rough posi ti oni ng data.

Gi ven th e outri gh t l evel of fl at pri c e, total spec ul ati ve noti onal val ue i n th e oi l spac e h as topped $80 bi l l i on, a fi gure

l ast rec orded i n 2018, despi te open i nterest remai ni ng rel ati vel y l ow. Wi th th e el evated noti onal l evel , th e market i s

bound to ex peri enc e c orrec ti ons, wh ere c rude someti mes trades i n c orrel ati on to c ertai n mac ro narrati ves. Net

spec ul ati ve posi ti ons i n Brent and WTI fel l by 62 th ousand l ots over th e l ast two weeks, wi th net posi ti oni ng as a

perc entage of open i nterest fal l i ng to 11.8%, a 7-week l ow. In c ompari son, net l ength i n RBO B, h eati ng oi l and gasoi l

as a perc entage of open i nterest remai ned steady at 14%. We bel i eve th e mac ro fears h ave pul l ed down fl at pri c e and

struc ture i n c rude markets, wh i l e th e struc tural strength i n produc t markets h as l eft c rac ks rel ati vel y unsc ath ed.

Th i s i s c onsi stent wi th th e demand i ndi c ators we fol l ow,

Fig 8: R BOB n et spec len gth , % open in terest

and i f h i story i s any gui de, el evated spec ul ati ve l ength

c an be h el d i n produc t markets for ex tended peri ods. In

2022 2021 2019 2012
2012, we h ad a si mi l ar bac kdrop of refi nery c apac i ty
35
i ssues (fol l owi ng th e Petropl us bankruptc y) and mac ro
30
c onc erns stemmi ng from th e European fi nanc i al c ri si s, 25
yet gasol i ne spec ul ati ve l ength (as a perc entage of open
20
15
i nterest) h overed between 20–25% th rough Q 3 12
10
before reac h i ng dec ade h i gh s Q 4 12.
5
0
We model U S gasol i ne demand as bei ng dri ven by (5)
empl oyment rath er th an GDP, refl ec ti ng our bel i ef i n th e
(10)
Jan Mar May Jul Sep Nov
c onti nued si gni fi c anc e of dri vi ng to work, despi te th e

post-CO VID i nc rease i n work from h ome. O ver th e nex t

18 month s, we fi nd th at l arge c urrent and future ri ses i n

So urc e: CFTC, Bl o o m berg, Energy A spec t s

U S retai l gasol i ne pri c es h ave th e potenti al to l ead to a

2% dec rease i n gasol i ne demand. However, over th e peri od 2008–19, i nc reased empl oyment l ed to a 4.2% i nc rease

i n demand; l arger th an th e 2.7% i nc rease i n demand due to dec reased pri c es. In oth er words, even wi th sl owi ng

ec onomi c growth , U S gasol i ne demand may not c ome off as sh arpl y as dec reasi ng empl oyment woul d, and wi th an

ex tremel y ti gh t l abour market, empl oyment wi l l remai n buoyant for th e nex t few years.

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27/06/2022 11:45 No change, all change - Energy Aspects

Fundamental l y, i f produc ts markets and refi ni ng margi ns stay el evated and forward bal anc es remai n c onstruc ti ve, i t

wi l l be di ffi c ul t for c rude to sel l off for l ong. But unti l mac ro j i tters c al m down, c rude wi l l struggl e to ral l y. So, th e nex t

few weeks wi l l be vol ati l e and l ac ki ng muc h di rec ti on. Yet, th e market sh oul d not get c ompl ac ent. Wi th i nventori es

gl obal l y at rec ord-l ow l evel s, even th e smal l est suppl y di srupti on c oul d c h ange senti ment, even i f rec essi onary fears

persi st.

Key changes to balances versus last publication

Our 2022 crude balance so ened w/w as upward revisions to supply outpaced higher runs.

Our 2022 crude and liquids balances so ened w/w, mostly on upward revisions to Russian supply offsetting an

increase in Russian runs and demand. The bulk of the loosening is in Q2 22–Q3 22, before embargoes on Russian

crude and products kick in at year-end and in early 2023.

We raised our forecast for 2022 Russian runs as domestic demand is proving resilient to sanctions, encouraging

higher throughput.

An increase in Russian runs was offset by stronger Russian supply, as higher throughput is allowing the country’s

producers to maintain robust output.

We raised our Libyan supply estimates in June–July on reports that Es Sider has continued to export and Sharara

has partially ramped up. High levels of political risk remain, however, and supply risks are unlikely to abate.

Higher Libyan output offset a cut to supply in Ecuador, where Petroecuador declared force majeure.

Upward revisions to demand are led by Russia, followed by the US, where other oils demand has proved stronger

than expected.

Fig 9: Su mmary of key c h an ges to c ru de balan c e, mb/d

So urc e: Energy A spec t s

Fig 10: Su mmary of key c h an ges to liqu ids balan c e, mb/d

So urc e: Energy A spec t s

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