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THE ONYX VIEW
AUGUST 2018

Published 6 AUGUST 2018

 

What do we expect IN AUGUST?

 

Further futures alignment
with physical in Crude

For August, we expect to remain in an oversupplied crude market. We expect Europe will continue to struggle to clear with August maintenance out of the picture, the Asian physical market will continue to slow down - which will filter through to pricing out the benchmark - and the US will continue to export elevated levels of crude to Asia and Europe, putting pressure on all 3 benchmark crudes.

 

 
 
 
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As the refiners continue to maximize their runs and hedge whilst doing so, it will ensure a steady supply of products to the market.

 

Physical oversupply in products with
margin hedging, maximizing runs and
end of summer cycle

We have seen weak prompt pricing across the barrel and strong indications that refineries are rushing to lock in paper profits, particularly as the physical in the prompt remains underwhelming versus strong sentiment in deferred paper. As the refiners continue to maximize their runs and hedge whilst doing so, it will ensure a steady supply of products to the market. Here is where we expect to see the oversupply of crude transpiring into an oversupply in products - we therefore expect products such as Naphtha, Heating Oil and Gasoil to show signs of weakness. The market will be unable to absorb the steady supply of products, turning sentiment bearish as both weak prompt pricing and high inventories apply downward pressure to the markets. Following this, we will see downside in flat price as the oversupply weakens margins and results in short selling.

However, Gasoline may be the sore thumb as hurricane season in the US approaches. Since the Gasoline market is particularly vulnerable to outages, we expect this product to hold relative to the rest of the barrel through sentiment, and rally in the event of a hurricane.

 
 

OUR CONCLUSION
AUGUST 2018

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We expect the weakness to continue for products relative to Gasoline due to the hurricane threat, and so would suggest short exposure to Heating Oil-Gasoline spreads.

 

Short VZ HO-Gasoline box

We expect the underlying crude oil physical market to be under pressure, but would suggest getting short structure outside of the pricing month to avoid prompt dislocations.

 

Short crude structure

zM Brent

Our overarching view is the crude oil market is fundamentally weak, and the physical and futures market will re align going in to the second half of the year.

 

Buy put option

Short Brent flat price
(February 2018 put option)

 

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