As trade talks between the US and China get back on track, it could prove to be a game changer as it will prompt another turnaround in global oil demand expectations and this could be a big positive for crude, says Vandana Hari, Founder & CEO, Vanda Insights. Excerpts from an interview with ETNOW.
What is happening in crude. Overnight, there was a 4% spike. What explains that?
We might be at an inflexion point for the crude markets. It looks like the US and China may bring their trade negotiations back on track. The talks seemed irretrievably broken down at the start of May and that was a major bearish factor on crude prices. We saw crude tumble 20% to 22% depending on whether you are looking at Brent or WTI.
Purely as a result of the worsening trade war between the US and China, we have had a spate of macroeconomic data from not just the US and China but even other major economies across the world which has not been too encouraging and that resulted in a lot of analysts revising down their expectations for global oil demand growth.
This could be a major turning point if Xi and Trump do meet up and to use Trumps words, he said “he is going to have an extended meeting” with Xi and the two negotiating Ts from US and China are going to meet ahead of the meeting. All of this conveys the sense that they are trying to get the negotiations back on track. It could be a game changer because this will prompt another revision, a turnaround in global oil demand expectations and this could be a big positive for crude.
Do you feel that what we are seeing here is more structural or is it at this point incredibly sensitive to what we are seeing on the geopolitical front?
Just a couple of factors I would like to mention in relation to the volatility that we have seen in crude. One, it is important to bear in mind that there appears to have been a divergence between the euphoria that we have seen in the stock markets ever since the Federal Reserve chairman and some of the senior officials started indicating a dovish pivot and this has happened around the end of May, early June.
We saw quite a substantial rally in the US stock markets and to some extent the global stock markets but crude did not really respond to that. That tells me while a rate cut may be seen as a positive and as a supporting factor for the stock markets, it would not necessarily offset the impact of the US-China trade war.
There was a bit of divergence and that is why we have seen a bit of uncertainty lingering in the crude markets. The other reason was, of course, heightened geopolitical tensions in the Middle East. Let us not forget we had these attacks on two oil tankers in the Gulf of Oman last week coming just within a month of attacks on very similar attacks in the same region on four oil tankers. That had injected a bit of geopolitical fear premium in crude.
If later tonight we hear the Fed is signalling a rate cut, I think crude will be supported but it will probably be a little bit cautious because a rate cut which is clearly positive for the stock markets, does not do that much for putting the global economic growth back on track.
However, if US-China trade talks are back on track, that is probably going to be a much bigger impetus for crude prices to move higher.
What is the outlook on refining margins? What according to you are the triggers that refining margins have been subdued for such a long time?
Refining margins have been worth writing home about pretty much since late last year. There was a major drop in December and that sort of modest not too great margins have persisted since the start of this year Q2 especially in Asia. The second quarter has not been much better than the first quarter of this year. The refining margins track two major things; a)what crude prices are doing and b)what refined product prices are doing as these are directly related — sentiment wise as well as actual refined product demand wise — to the health of the global economy.
Crude prices went up substantially and then went down quite a bit because of the worries over US-China trade war. If you look at products demands, it has not been very strong and the other thing we have noticed is there has been a divergence globally.
In May for instance, global refining throughput was at a two-year low but that was more in northwest Europe and in the US Midwest there were outages, maintenance shutdowns but not so in Asia. As a result, Asian margins did not pick up as much as some of the uplift that Europe and north US saw in refining margins.
There are some factors on the horizon which might keep refining margins under pressure in the third quarter of this year. As refineries come out of maintenance and some of the other unforeseen outages end as well a lot of refining capacity that was shut out of the market is expected to be back on the market, there will be a fiercer demand for crude which will support crude prices. At the same time, it might depress product prices because there will be many more products in the market.
Towards the fourth quarter of this year, there could be a substantial support from gas oil or diesel, the middle distilled part of the refined products slate. We are Read More – Source