Oil Price Sell-Off Won't Last Based On These Signals
On June 12, we published our WCTW titled, "Bottom of the 2nd Inning - What Signs to Look for on Oil." In that article, we clearly listed variables we needed to watch out for in case the physical bullishness we saw in the oil market faded.
One of the most important indicators was what happened to refining margins in the event of a crude sell-off. If refining margins increased when crude sold off, then we are actually ok. In addition, if the crude sell-off is not met with the same weakness on the physical timespread front, then we are ok as well.
3-2-1 Crack Spread
As you can see in both charts above, despite the crude sell-off we are seeing now, both of the indicators we said to watch for carefully are actually performing well. This indicates to me two things:
The physical oil market tightness remains strong. High refining margin also indicates end-user demand, for now, is fine. Low refining capacity coupled with low product storage will likely keep refining margin elevated. However, we expect +5 million b/d of global refinery throughput in the next 2 months.
Despite the crude sell-off, timespreads are moving higher. This indicates to me physical demand for crude remains strong. As a result, the sell-off in crude appears to be pure financial positioning/hedging.