This Indicator Has Always Worked For The Oil Market
For long-time readers, you may remember our articles back in 2020 pointing out the "forward drivers" of the oil market. In one of the articles titled, "Oil price rallies ahead of fundamentals," we said the rebalancing process for the oil market was as follows:
Demand > product storage moving lower > refinery throughput moving higher > margins moving up > crude rallies > timespreads move into backwardation > crude storage draw
Fast forwarding to today, you can use hindsight to see over the last 2-years how this exact process played out in the oil market. One thing we are always keenly aware of when analyzing the oil market is that nothing is ever certain.
But more often than not, the refining margin indicator has always been a great leading indicator. The reason why this is the case is that crude only has one user, refineries. By tracking refining margins, you are able to figure out whether or not product storages are tight or loose, and whether forward demand (for crude) will increase or decrease.
When refining margins move higher, it usually signals an impending increase in demand for crude, which in turn translates into higher crude prices. You can see that in the step logic we illustrated in that article back in 2020.
Now if we look at this forward leading indicator, global refining margins are back on the move and they are moving higher fueled by heating oil.