Oil: Deal or No Deal

Research evidence excerpt

Oil: Deal or No Deal

Refining Margins

Margins have benefited from the crude sell-off amidst several catalysts that have potential to tighten product balances.

Refined product stocks began the summer below the 5-year range and remain sensitive to unplanned refinery outages. The

super El Nino (Spanish for The Nino), has the potential to continue the extreme heat currently being experienced in Europe,

and a below average Atlantic hurricane season. Season to date, European refineries have already been challenged by elevated

temperatures with units reliant on cooling for proper operation at heightened risk of disruption.

Compared to crude, clean product export recovery has been slower. This is particularly notable for diesel/gasoil given the

recent Russian export ban through end of July. Mideast Gulf diesel/gasoil exports are still ~800 K BPD below the pre-war level.

Combined with Russia, this represents ~20% of pre-war waterborne gasoil exports, or 1.6 M BPD.

Looking Forward

We are ST bullish for crude with the possibility that the recent escalation could trigger short covering with ICE Brent managed

money shorts sitting at 99th percentile of the historical positioning between 2021-2025. Even if the market is largely looking

past the rising tensions (which we believe it is), it will be difficult for a re-closure of the Strait of Hormuz to not reprice oil

higher. The expectation that the rising tension won't last long is likely to limit the rally, in our view. The massive layering of

supply including AG barrels reentering the market, previously sanctioned Iranian barrels reaching refining centers, SPR barrels,

pipeline re-routes, and Chinese re-exported barrels all are likely to weigh on fundamentals.