For most of 2024, we have been saying that oil prices were too low relative to where fundamentals were. WTI should have been trading near $80/bbl as opposed to $71/$72 just a few weeks ago. But following the recent rally, we see the latest oil rally pausing for a bit. There are a few key reasons as to why:
Speculator positioning is starting to unwind from ultra bearish to slightly bearish.
Global crude balances are set to build in the incoming global refinery maintenance season.
Refining margins have not rallied in tandem with the latest crude rally. This signals that the market can't handle higher prices (at the expense of refining margins).
OPEC+ crude exports have not declined meaningfully. You can interpret this either way. For the bulls, the market is tight despite OPEC+ not cutting. For the bears, the cut is a mirage.
For us, the key for the first half of 2024 is dependent on demand. We know that global oil supplies will be lower than in Q4 2023, but if demand isn't as strong as we expect, then global oil balances will build.
Now keep in mind that in Q4 2023, we saw global oil inventory draws of ~400k b/d (according to the IEA). Coming into Q1 2024, global oil demand is normally at its seasonal low, so the drop in demand will have to be compensated via a decrease in supplies. This is why we are fixated on what global refining margins are doing. For us, this is the easiest way to gauge how demand is doing, so anytime we see refining margins pullback, we become a bit wary.