The Oil Market Is Kind Of Doing Everything We Hoped For
A month ago, we wrote a few articles on where we thought oil was headed. If you like a refresher on those, here are the articles:
Here's Where I Think Oil Is Headed
Bottom Of The Second Inning - What Signs To Look For On Oil
The Oil Market Is Going To Be Rangebound
If you have already read these articles, then you know that our common themes are:
Crude is rangebound.
Refining margins will fall, but physical timespreads for crude will move higher.
Energy stocks remain a buy, but investors will grow increasingly frustrated by the disconnect between oil and energy stocks.
Fast forwarding to today, everything we had hoped for in the oil market is coming to fruition. Crude is currently in the process of finding the lower band where demand starts to rebound. The market has not found this floor yet so we will still be in this process for a few more months. But in the meantime, refining margins are falling as the increase in global throughput is putting more pressure on margins.
Source: Barchart.com
As you can see in the 3-2-1 crack spread chart above, we've gone from a peak of $55/bbl down to $35/bbl. And for those keeping track, with WTI trading around ~$97/bbl, the implied crude + refining is down from $180 a month ago to $132/bbl.
But this does not explain the whole picture. Remember we said that if refining margins are falling, it has to come from the market seeing higher refinery throughput. As a result, we would need to see crude timespreads pick up, or else it's an indication of lousy demand for both products and crude.
Source: Barchart.com
Luckily, that is the case as the Brent 1-2 timespread is marching to another high.