This will solely imply one factor for the oil market going ahead

I’m very bullish on the oil market. I am so bullish, It hurts. One of many apparent setups going ahead is the intense tightness we’re seeing within the winter distillate market.

Regardless of being in the midst of refinery upkeep season, distillate inventories are at multi-year lows. Mix this with gasoline stock hovering round all-time lows this time of 12 months, and product stockpiles are “uncomfortable” this winter.

Consequently, the 3-2-1 crack growth has been by the roof.

This tells me this isn’t a standard refinery upkeep season. Based on Vitality Points, international refinery upkeep for October and November is 6.952 million b/d and 4.589 million b/d, respectively.

For December, that determine drops to 2.232 million b/e. Over the following 2 months, international refinery output is predicted to extend by ~4.7 million b/e. Now for example China will not elevate its zero COVID coverage for a second, the refining margins are virtually screaming, “improve yield please”.

As these refineries attempt to exit the upkeep season as rapidly as attainable (because of elevated margins), demand for crude will improve considerably. However right here comes the issue. Saudi and Russian crude exports shall be decrease on the finish of the 12 months. As well as, US shale oil manufacturing is disappointingly down, presumably ending the 12 months at solely ~12.25 million b/d, up from ~12.5 million b/d earlier.

From a provide perspective, we’ve got zero surprises going ahead, that means if our evaluation is appropriate concerning the incoming distillate scarcity and the related improve in refinery throughput, crude shall be an enormous tailwind.

Now that the SPR launch is lastly coming to an finish on the finish of November (~10 million bbl is scheduled to be launched in November), you abruptly have a scenario the place market members are scrambling for crude. It occurred within the spring of this 12 months after the Russian/Ukraine invasion, and we imagine it’s deliberate to occur once more on the finish of the 12 months.

What does this imply for the worth?

I believe we’ll finish the 12 months north of $100. The one query is whether or not we see demand from China return.

You possibly can see within the chart above how a lot China’s oil demand has fallen this 12 months. Assuming no additional restoration in Chinese language oil demand, we count on the vary to be nearer to $100 to $105. Now, if there’s any indication that China will launch the zero COVID coverage, then we see it finish nearer to $120 and $125.

The approaching bodily tightness within the commodities market will catch most monetary market members unexpectedly. Mix that with decrease Saudi and Russian crude exports, and we see a state of affairs the place refiners are scrambling for crude in 2023. The SPR is predicted to finish by the top of November and US shale oil manufacturing progress is disappointing. Oil bulls simply want to carry on to demand till the top of the 12 months. If that’s the case, oil costs will finish a lot increased by the top of the 12 months.