Gasoline Bullishness should Counterbalance Futures Bearishness

By Faisal Faeq

Brent crude price averaged $89/bbl in April primarily supported by bullish speculative activities that rose to the highest level since March 2021 on substantial financial flows into the futures market. However, speculative activities slowed down considerably in May, which led Brent crude price to drop to $82/bbl and still moving in the narrow range of $84-82/bbl over the course of May.

Obviously, oil prices deterioration caused by huge speculators selloffs amid bearish sentiments from mixed US economic data, and uncertainty on an interest rate cut due to the Fed signalling inflationary concerns.

Surprisingly however, the improving China’s macroeconomic on higher 6.7% year-on-year industrial output in April amid a recovery in manufacturing sector, which improved Chinese crude oil consumption and higher crude oil imports that reached 11.6 million barrels per day (bpd) should have pushed oil prices higher and counterbalance the bearish sentiments from higher-than-expected US inflation data.

The physical crude oil market for SPOT prompt sour barrels have witnessed firm demand for May loading barrels amid Asian refineries coming back from spring maintenance season ahead of the peak summer season. On the other hand, weakening refining margins and high supply availability of light sweet crude, specifically from US crude exports have put downward pressure on light sweet crude barrels that have weakened amid lower demand from European refiners and lower refining margins.

Russia is one of the world’s largest suppliers of diesel. Russia exports around 2.8 million barrels per day (bpd) of petroleum refined products, which has since fallen to around 1 million bpd. In April, Russian refining capacity decreased by 13.6% versus March due to maintenance, technical outages and Ukrainian drone attacks. This is coupled with a six-month ban on gasoline exports from March to supply domestic demand amid rising demand from farmers and the summer driving season. Both gasoline and diesel account for a sizable portion of Russia’s transportation and are heavily used in the agricultural and industrial sectors.

Lower gasoline exports from Russia should have put upward pressure on oil prices, especially amid the robust US gasoline demand that should push oil prices higher. In April, US petroleum refined products imports rose to 6.5 million bpd, led by gains in gasoline inflows. However, the market is still weighed down by higher diesel supplies and weakening refining margins, which fell from $29/bbl at the beginning of the year to $15/bbl, the lowest in 11 months. This has pushed refining utilization lower in Europe and Asia.

US domestic gasoline consumption levels are set to continue improving as the driving season approaches, and the market has already started absorbing it. Also, the sharp drop in gasoline stocks and higher gasoline imports have lowered US gasoline exports. All those bullish developments in the gasoline market should have pushed oil prices to even higher levels than in April.