9 May 2024 Vortexa
The global oil price rally has stalled. Rising onshore crude inventories and falling middle distillate cracks are posing downside risks on prices.
Global oil prices are stabilising following weeks of persistent gains. Market fundamentals are increasingly pointing towards a reversal of supply tightness that had gripped the market, with a rebuilding of onshore crude inventories and weakening middle distillate cracks casting growing uncertainties on demand. The cooling of market sentiments following a pause on escalations of geopolitical tensions have capped upsides on oil prices but the risks are far from removed.
Global onshore crude inventories rebound, in-transit flows climb
After touching a multi-year low in March, global onshore crude inventories have started rebuilding. Prominent increases are seen in the Middle East and Northwest Europe, with levels reaching their highest since last June and September, respectively. Above-ground crude inventories in China, which started drawing since last August through to this February, have reversed to show a slight net build over the last two months. Besides the accumulation of stocks in storage terminals, seaborne in-transit volumes have also been on the rise in recent months, up nearly 4% in April versus January, adding to the length in the market.
Post-turnaround refinery ramp-ups capped by falling middle distillate cracks
Some may argue that the reprieve on the global crude market tightness could be temporary given peak refinery maintenance season in Asia and Europe this quarter. As with previous years, refiners are likely to ramp up crude runs after turnaround but falling middle distillate cracks could dampen sentiments. The weakness in middle distillate cracks despite ongoing refinery maintenance reflects ample global supplies against a backdrop of lacklustre demand. Elevated crude prices are further eroding refining margins, with several refiners considering refinery run cuts in the weeks ahead.
Lukewarm VLCC and Aframax freight rates further confirm the absence of a strong post-turnaround refinery ramp-up in Asia and Europe. A closed US-Asia WTI arbitrage despite tight Middle East crude supplies has led to fewer long-haul VLCC bookings, weighing on tanker freight rates.TD3C (Middle East-to-China VLCC) rates are averaging $13/t as of the last week of April, the second-lowest weekly average so far this year. Meanwhile, TD25 (US Gulf-to-ARA Aframax) rates have risen by 13% w-o-w last week, but remain well below levels seen at the start of the year, suggesting weakness in tanker bookings for US crude deliveries to Europe.
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