Key Atlantic Basin products are now in backwardation
For all the hype about the WTI crude oil market potentially moving into backwardation later in the year, European ICE gasoil and NYMEX RBOB gasoline markets in the Atlantic Basin have quietly started to price in a premium for immediate delivery. Our analysis suggests that market leadership has shifted from crude to products in the last year, and that tightening gasoline and distillate spreads are causing WTI and Brent timespreads. The shift partly reflects a hefty refinery maintenance season and continued reductions in disadvantaged refining capacity, but also points to an incipient recovery in US and European oil demand.
Advanced economies are finally showing signs of recovery
Total oil consumption in the United States has now finally turned positive on a yearly basis. The latest US Department of Energy weekly figures suggest that domestic oil demand expanded by 650 thousand b/d or 3.5% YoY on the 4-week moving average. Meanwhile, many forecasters still expect an outright contraction in US oil demand for 2010. In OECD Europe, despite the reported 8% contraction in oil demand in January, GDP growth numbers show an improving outlook, again supporting a stronger refining margin environment.
Distillate cracks will strengthen further with the economy
With indicators suggesting continued improvements in global economic activity and industrial production firming up, we reiterate our positive view on Atlantic Basin middle distillates. Thus, we maintain our forecasts that US distillate cracks will average $11.00/bbl for the second half of 2010, compared to a current forward of $9.30/bbl. We equally keep our European gasoil crack spread forecast for 2H10 of $11.25/bbl compared to the forward of $9.20/bbl. Still, the combination of low refinery utilization rates and plenty of flexibility to switch yields should limit the risk of a petroleum product price spike in the months ahead.
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