Blue Lacy Advisors, LLC - Seasonal Factors Abound

Minneapolis, MN | February 22, 2023 | By: Steve Sinos, Blue Lacy Advisors, LLC

Crude Oil

Technical factors seemed to dominate the market in recent weeks. Since setting a post-war low close of $76.10, prompt Brent has inched its way to retest the $85-90 range. There are technical resistance levels and seasonal patterns that may contribute to this developing pattern. Only twice in the last ten years has the average price of crude oil been lower during July than the average January price, including the catastrophe that was 2020. 2017 and 2020 were the only two years since 2014 in which prices consistently traded lower through the summer. The average monthly price of oil was 15% higher during July than during January, excluding 2020. Speculative traders on the exchanges had already spent the month of January establishing length, adding >50k contracts of net length in futures to bring the net position just 6k contracts shy of being net long. This move was almost entirely driven by money managers, whose position moved net long by >96k contracts during the month, recording two consecutive full months of adding length and closing shorts. Unfortunately, the Commitment of Traders reports have not been released in two weeks because of a third-party software problem, so we don’t know whether this trend has continued.

Russian oil production and exports have been at the center of uncertainty over the last year, with sanctions, price caps, and other interventional measures attempting to limit how the country can benefit from its resource after invading Ukraine. Until now, we could only speculate on how many barrels would be lost from global trade, especially as tracking data had pointed to a supportive network of traders willing to take Russian barrels. On Friday, the Russians announced they would voluntarily cut production by 500kbd. Importantly, this appears to be an actual cut, not just a lowering of their commitment to OPEC+, so even though 500kbd was near the lower end of analysts’ forecast cuts, it looks like a tangible loss of supply. We will track it in the context of trade flows in the coming weeks. Over the last four weeks, Russian waterborne exports averaged 5mm bpd, nearly 40% of which went to China and India. ~1.6mm bpd still flowed to Europe, with Italy, Greece, the Netherlands, and Turkey each taking >200kbd. Turkey was the top importer of Russian crude over the last month with ~245kbd. The earthquake was reported to have damaged its oil terminal on the Mediterranean coast but has already resumed loadings, according to several media outlets.

Products

Products’ price gains lagged oil’s last week, leading to a further contraction of crack spreads. NYMEX diesel was up just 4% compared to WTI’s 8% across the 12-month strip. The average crack for the upcoming three months ended the week at $38.94 - only the third time the average has been below $40 during the last six months. Gasoil’s crack to Brent tightened to $23.65 across the three-month strip after closing as low as $21.52 during the week. Both spreads are inching closer to levels more typical, suggesting a slowly normalizing relationship between crude and products.

In a scenario of normalized cracks (i.e., lower), geographic and calendar spreads are more important for trade flows. Month-over-month backwardation in gasoil is about $6.82 on average across the 12-month strip, down from a 2023 high average of >$16/tonne. NYMEX Diesel’s 12-month strip is comparatively flat, with an average MoM backwardation of just over $0.01/gal. A combination of a softening curve and falling cracks is historically a bad sign for a rally and conflicts with the bullish positioning and trends in crude oil.

*This summary is based off February 12, 2023

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