The Commodities Feed: Spreads tighten for crude oil

Crude oil has been trading soft in the morning session today largely amid signs of a larger inventory build in the US. However, time spreads tightened for both Brent and WTI showing stronger demand for crude oil in the physical market. Prompt spreads for ICE Brent crude increased to a 5-year high of around US$1/bbl of backwardation while for WTI it tightened to around US$0.6/bbl of backwardation.

Latest data from the American Petroleum Institute (API) shows that the US crude oil inventory increased by 8.43MMbbls last week, more than the average market expectations for a build of around 2.6MMbbls/d. If confirmed by EIA, this would be the fifth consecutive week of addition to the US oil inventories. Similarly, Cushing crude oil stocks are reported to have increased by 1.8MMbbls. However, product inventories saw declines with gasoline and distillate stocks falling by 3.3MMbbls and 0.5MMbbls respectively over the week ending 23 February. The more widely followed EIA inventory report will be released later today.

The focus is gradually shifting to the OPEC+ decision on voluntary output cuts for the second quarter of 2024. The group could announce its decision over the first week of March and expectations are that the group may extend the existing cuts considering the softer crude oil prices. Since announcing the voluntary cuts at the end of November 2023, ICE Brent has traded soft amid demand concerns and have just recovered recently only to November levels of US$83/bbl. The demand prospects remain muted in the short-term due to the economic slowdown and the group may need to keep cuts in place to maintain market balance.

In products, gasoline margins in the US jumped to the intraday highs of US$30.85/bbl yesterday, the biggest margin in over six months on account of relatively stronger demand on the back of a warmer winter season. Driving activity in the US remained relatively stronger over the past few months and supported gasoline demand. Meanwhile, distillate margins continue to move lower and are currently hovering near December lows.

Aluminium consumption in China will remain soft this year primarily due to the prolonged weakness in the country’s real estate sector, according to the latest report from Beijing Antaike Information Development Co.

Antaike now expects the aluminium demand to see only a modest gain of 1.7% year-on-year to 48.67mt in 2024 amid a slowing economy, compared to the annual growth of 7.6% seen a year earlier. The group further added that the demand from the construction sector (the biggest contributor) is expected to drop by 2.5% YoY to 15.2mt this year due to a decline in property completion. The construction sector’s share will account for about 31% of total usage in 2024, down from nearly 40% seen in 2017. However, Antaike remains optimistic about the growing demand from emerging industries such as new energy vehicles, solar power, and lithium batteries in the long term.

We believe that while there are some upside risks mainly to do with green energy growth in China, outside of China demand outlook remains lacklustre. Still, we believe that prices will start rising slowly this year as demand begins to recover gradually.

Our short-term outlook remains neutral to bearish for demand, and we do not foresee a substantial recovery before the second quarter of 2024, which should be the starting point for Federal Reserve rate cuts. There is a risk, however, for demand to weaken further if high inflation keeps interest rates high.

The latest LME COTR report released yesterday shows that investors boosted net bullish positions for copper by 2,204 lots for a second consecutive week to 68,879 lots in the week ending on 23 February. Similarly, net bullish bets for zinc rose marginally by 170 lots after three consecutive weeks of decline to 11,203 lots at the end of last week. In contrast, money managers reduced net bullish bets for aluminium by 8,460 lots to 111,516 lots as of last Friday.

The latest fortnightly report from the UNICA shows that sugar cane crushing in Centre-South Brazil stood at 0.55mt over the first half of February, compared to just 0.07mt during the same period last year, as the processing had almost completed by this time last year. The cumulative sugar cane crush for the season as of mid-February rose 19% YoY to 646.6mt. Meanwhile, sugar production rose by 1051% YoY to 27kt over the first half of February. Around 37.6% of cane was allocated to sugar production over the fortnight, higher than the 23.6% allocated for sugar production in the same period last year. Cumulative sugar output so far this season stands at 42.2mt, up 25.6% YoY.

Weekly data from the European Commission shows that soft wheat exports for the season so far fell 3% YoY to reach 20.5mt as of 22 February, down from 21.1mt for the same period last year. The decline was mainly due to the availability of cheaper supplies from Ukraine. The primary destinations for these shipments were Morocco, Nigeria, and Algeria. Meanwhile, EU corn imports dropped 40% YoY to 11.5mt in the season so far due to higher domestic output this year.