With oil prices set to fall for a second straight year and a supply surplus widely expected by 2025, bullish traders are clinging to positive signals in the downstream market.
Fuel oil prices in Asia hit their highest level since 2022, while European main fuel prices for ships and power stations reached their highest seasonal level since at least 2010. Diesel prices have risen in recent months, while naphtha, used in plastics production, is near multi-year highs.
The strength of refined products relative to crude could be a sign that the demand outlook isn’t as bleak as some say.
The International Energy Agency predicts that even if OPEC+ delays raising production, there will still be a supply glut next year.
“The fundamentals are not great, but I think there are some bright spots,” Kieran Gallagher, managing director of Bahrain’s Vitol Group, said this week on a podcast hosted by Dubai-based consultancy Gulf Intelligence. He said fuel oil and naphtha “have been very strong,” surprising trading houses.
Brent, the global oil benchmark, has been trading in a narrow range between $70 and $77 a barrel since mid-October as geopolitical risks offset pessimism about a looming glut. Key calendar spreads, seen as an indicator of market health, also improved after the United States stepped up sanctions on tankers linked to Iran.
“Spreads were a little oversold initially, so some of this is catching up, especially as margins look better,” said Kitt Haines, global crude analyst at consultancy Energy Aspects.
The recent contango structure, where forward prices are higher than near-term supply prices, a bearish pattern, has improved. The backwardation between the two nearest Brent crude contracts has widened to 55 cents a barrel from 7 cents in late September.
The final factor that crude bulls like to highlight is the decline in inventories, which, according to the International Energy Agency, stand at about 100 million barrels in developed countries, slightly less than the world consumes in a day and below the five-year average. Some market observers believe this could even drive a modest rebound in oil prices.
"Oil prices are undervalued by about $5 relative to their fair value based on relatively low global inventory levels," said Daan Struyven, co-head of commodities research at Goldman Sachs Group Inc. The bank expects Brent oil prices to peak at $78 a barrel in June 2025, but will fall to $71 a year later.
Article forwarded from: Jinshi Data
