RBC Capital's take on the Global Oil Market - Aug 13

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RBC Capital has a World Class Energy Sector Team. Read this carefully.
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August 13, 2023
Oil Market in 60 Seconds: Physically Speaking…

Our Key Thoughts and Views in Under a Minute
 The oil market has been a tale of two crudes this year, until now. Much of the strength in global
physical markets this year has been driven by the medium and heavy, sour barrel. Such is clear
given the outperformance of the Dubai benchmark relative to its Brent counterpart (see Figure 1).
That said, key global, light, sweet marginal barrels have shown strong signs of tightening so far in
August. Most notably, Forties, which is the largest physical crude stream that prices the Brent
contract, has caught a meaningful physical bid so far this month, rising during eight out of the past
nine sessions after being the primary drag on the complex through July when prices were
discounted to Dated Brent. Forties traded in discounted territory for much of July but has since
rallied nearly a dollar above Dated Brent. Such a swift move is indicative of a strong physical bid. In
short, firming Forties, and strong bids for Nigerian barrels should help to fortify conviction from a
risk-taking vantage point. This is the physical signal that is reinforcing for market bulls that Brent
spreads have room to rally further, despite already trading at multi-month highs.

 This physical tightening event is occurring later in the summer than many anticipated. This is visible
with the aforementioned strength in North Sea and WAF markets, and likewise for the US balances.
Why are prices 18% higher than six weeks ago? CTAs turned from negative to neutral to bullish over
a short span over recent weeks. And while fundamentally driven investors have been looking to
deploy to the bull side, anecdotally, many appeared late on catching the move or were not right
sized to capitalize on the gains, thus leading to a chase that further fuels the upward momentum.

 The direction of the current crude price rally is not entirely surprising given that pent up bulls have
been waiting all year for the opportunity to deploy risk into a tightening fundamental framework
(See Figure 2 & our recent note – The Next Six Weeks Dictates the Next Six Months), what is
meaningful, and surprising is that crack spreads have led the complex higher during the recent rally.
A month ago, many would have expected that crude flat prices would rally, but the upside move
would cannibalize from the strong crack spreads. Tight US gasoline inventories are one thing, but
rallying crude into elevated cracks, in theory, is indicative of hyper strong end user demand. We are
cautious on cracks heading into the fall, but our real time, nowcasting indicators are evolving our
view that the strength in gasoline can be elongated further than previously anticipated.

 US gasoline inventories are nearly 17 mb below seasonal norms, and stocks are tight across all
PADDs, particularly on the East Coast, which accounts for 38% of the aggregate deficit. We can track
real-time connected vehicle visits across 93% of US gas stations, which helps us to nowcast US
gasoline demand as an alternative to the EIA's product supplied proxy. Our alt data suggests that
nationwide visits to the pump clocked in at +2.4% higher for July. This equates to 210 kb/d higher,
YoY, and the steady stream of stock draws reported by the EIA corroborate such a view. Our
preliminary nowcast, as a proxy for gasoline demand for August is registering even stronger,
implying a demand increase of some 725 kb/d, compared to the demand destruction levels of a
year ago. While there is room for cracks to soften, we’ll rely on our nowcast data as the key
inflection point to watch. Various refinery outages have helped to support cracks, but our view
remains that the refining complex will be challenged by the onslaught of new global refining
capacity set for commission over the next 18 months.

 Tangentially, key real time reads from our bespoke Vacation Price Index (VPI) and our Get Out and
Travel (GOAT index) suggest that just in time travel bookings have been taking place. Our trackers
of web searches of vacation rental properties (+7.8%, YoY over the past four weeks) have picked up
to levels that are abnormally strong for the season. Lack of vacations planned during the spring
(banking crisis, inflation, concerns about the labor market all contribute to the lag in bookings) is
leading to an increased degree of FOMO and a boomerang effect of just in time travel being booked
currently (as many of the aforementioned fears have subsided). Our Vacation Price Index measures
the rate of change of key components of a US vacation budget including: airfare, lodging away from
home, car rental, gasoline, and food away from home. Our latest readings indicate that VPI is
trending -6.5%, YoY, giving further credence to the recent pick up of just in time travel bookings.

Disseminated: Aug 13, 2023 18:01EDT; Produced: Aug 13, 2023 17:37ED