The Commodities Feed: Oil surges on escalation fears

Oil prices have surged this morning with Brent more than 2% higher at the time of writing, following unconfirmed reports of explosions in Iran, Syria and Iraq. If these reports turn out to be true, fears over further escalation will only grow, as well as concerns that we are potentially moving closer towards a situation where oil supply risks lead to actual supply disruptions.  

As we mentioned earlier this week, middle distillate cracks have come under significant pressure more recently which will be raising demand concerns. The prompt ICE gasoil crack is now trading close to US$18/bbl – the lowest levels since July last year. In addition to weaker cracks, the prompt timespread has also flipped from backwardation into contango, suggesting ample supply in the prompt market. The spread has weakened from a backwardation of more than US$9/bbl earlier this month to a contango of US$2.50/bbl currently.

Meanwhile, the latest trade data from China shows that diesel exports in March totalled 1.42mt, up from 630kt the previous month, but still down 1.7% YoY.

While middle distillate fundamentals are clearly weaker, there are still risks surrounding the market, given Ukrainian drone attacks on Russian refining capacity.

Inventory data from Insights Global show that gasoil inventories in the ARA region fell by 25kt over the last week to 2.12mt, but still leaves stocks largely around the 5-year average. In Singapore, middle distillate stocks fell by 1.07m barrels to 10.14m barrels, which again is still broadly in line with the 5-year average.  

US natural gas prices strengthened yesterday with front month Henry Hub futures settling more than 2.6% higher on the day. This is despite storage data from the EIA yesterday coming in largely in line with consensus. US natural gas storage increased by 50Bcf last week, compared to expectations for a 51Bcf increase, but below the 5-year average of a 61Bcf increase. Total US natural gas storage remains very comfortable with it standing at 2,333Bcf, up 22% YoY and more than 36% above the 5-year average. While high inventories have weighed on prices for much of the year, expectations for largely flat domestic supply growth and the ramping up of LNG export capacity later this year suggests the US gas balance should tighten later this year and into 2025.