Brent: Geopolitical risk keeps cracks elevated – ING

ING analysts Warren Patterson and Ewa Manthey note Brent has pushed back above $95/bbl as escalating Persian Gulf tensions revive supply risk and a geopolitical premium. They highlight record ICE gasoil cracks, extreme backwardation and ongoing disruptions to Middle East and Russian diesel exports. ING expects middle distillate cracks to stay highly elevated and volatile into seasonally stronger demand.

Brent and diesel cracks stay tight

“Brent pushed back above $95/bbl, reaching its highest level in more than a month, as Persian Gulf tensions escalated further. After weekend strikes, Iran hit two oil tankers in the region yesterday. The US, meanwhile, carried out additional overnight strikes on Iranian targets, adding fresh geopolitical risk premium to the market.”

“Developments in recent days brought risks to regional oil supplies back into focus. Weve seen oil flow through the Strait of Hormuz despite the stalemate between the US and Iran, but rising tensions clearly put crossings at risk. The US energy secretary said 17m barrels of oil flowed through the strait on Monday, the highest volume since the conflict began.”

“Escalation in the Middle East also dashes any hope for a recovery in refined product flows, leaving markets tight. This is mostly reflected in the diesel market, where the ICE gasoil crack traded to record highs yesterday of around $79/bbl, while the diesel crack in the US is trading well above $100/bbl. Timespreads reflect this acute tightness, with the ICE gasoil Sep/Nov spread trading at a backwardation of $80/t.”

“Given disruptions to Middle East and Russian diesel exports, and with little sign of an imminent recovery, middle distillate cracks are likely to remain highly elevated and volatile, particularly as we move towards seasonally stronger demand. The global refining system has little slack to make up for the disruptions we are currently seeing.”

“The latest API numbers show US crude oil inventories fell by 2.6m barrels over the last week. The picture was more mixed for refined products, with gasoline inventories up 300k barrels while distillate stocks fell by 300k barrels. The move in distillate stocks will do little to help ease tightness concerns.”