It’s a big day for oil markets with all eyes on US-Iran nuclear talks, which are scheduled for later today. A constructive resolution would likely prompt the market to gradually unwind as much as a $10/bbl risk premium, which we believe is currently priced in. If talks break down, the upside risk remains, but the market may hold off on a full reaction until the scale of potential US action against Iran becomes clearer.
Targeted and brief strikes that avoid energy infrastructure (like those seen last year) with limited retaliation from Iran, would likely provide a brief spike higher in oil prices. The move, though, would likely be short-lived. Longer-term action from the US, with more aggressive retaliation from Iran, would increase supply risks for the oil market. This would make any further price increases more sustainable.
While the flat price remains well supported amid geopolitical uncertainty, ICE Brent timespreads have come under much more pressure recently, suggesting the physical market is becoming increasingly well supplied. Kazakh oil flows from the CPC terminal are normalising following disruptions earlier this year. Floating storage continues to decline, indicating that previously stranded sanctioned barrels are finally finding buyers and moving toward their destinations. If we are to see de-escalation between the US and Iran, it should allow weaker fundamentals to feed through to a lower flat price — particularly if OPEC+ resumes supply increases from April, which we believe they will agree to this weekend.
Yesterday’s inventory data from the Energy Information Administration (EIA) was bearish. The EIA reported that US crude oil inventories increased by 15.99m barrels over the last week- the largest weekly increase since February 2023. The increase was dominated by inventory builds on the Gulf Coast. Crude oil imports increased by 135k b/d WoW, while exports fell by 277k b/d. Refiners also reduced their run rates by 2.4 percentage points to 88.6%, which added to the inventory build. For refined products, gasoline saw an inventory drawdown of 1.01m barrels, while distillate fuel oil stocks grew modestly by 252k barrels.
European natural gas storage continues to trend lower, although at a slower pace amid milder weather. Gas storage is about 30% full, well below the 5-year average of 47%. Storage is on track to finish the heating season near or below 2022 levels. However, the ramp-up of LNG export capacity continues to offer some comfort to the market. The latest positioning data shows little change in the TTF investment fund position over the week, with funds continuing to hold a net long of 109.5TWh.
There’s growing noise within the EU for reform of the Emission Trading System (ETS), with 10 EU industry ministers yesterday calling for changes to the EU ETS to make Europe more competitive. The ministers said that “decarbonisation should not be achieved by deindustrialisation”. The European Commission is set to propose reforms to the EU ETS by the third quarter. We are likely to experience increased noise until then. Investment funds have been spooked by growing calls for changes to the EU ETS. The latest positioning data shows funds sold 13.6k contracts over the last reporting week, leaving them with a net long of 68.8k contracts. This is down significantly from the 126k net long held back in mid-January.