Asian crude oil demand was muted in the first half of March but the situation is changing as an increasing number of refineries come online following the seasonal turnaround period. Nevertheless, the Dated Brent crude market appears stuck between a rock and a hard place due to several contrasting factors.
On one side, the market has to discount record high US crude output levels and Chinese stock figures, resulting in higher inventories; while on the other side, it has to factor in the approaching driving season and the IEA forecasting a higher demand for crude and products in 2018. Volatility remains the only constant in the market.
Dated Brent moved sideways in the first two weeks of March because the increased competition from American, Mediterranean, West African and Middle Eastern crude barrels prevented North Sea grades from moving higher. Furthermore, the arbitrage to the Far East, in the first half of March, seemed not to offer many opportunities with Korean and Chinese clients showing no buying interest for Forties.
In particular, Chinese crude stock figures showed an increase in inventories and if we consider that, in January, almost 56% of the Forties volume loaded at the Hound Point was shipped over to China, it is clear why the first half of the month did not present great arbitrage opportunities.
However, the last trading days of March, saw a net increase in buying activity thanks to some Asian refineries finally getting back online after the turnaround period. Internationally, the Energy Information Administration stated that, in March, the US crude output had increased to 10.4 million b/d, which is the highest level ever recorded, while the International Energy Agency estimated that global oil demand in 2018 should average 99.3 million b/d and that OPEC members would likely produce an average of 32.4 million b/d over the year as a whole.
The Volatility Premium indicates that both the implied and realized volatilities are likely to move sideways in coming weeks probably favoring a rangebound trading environment. Moreover, the probability distribution analysis shows that Dated Brent’s monthly volatility is trading within a fairly stable area so it is probable that it won’t move much from where it is implying a relatively calm market with prices trading in a channel fashion.
Finally, the Volatility Cones analysis suggests that the current monthly volatility is very close to its median value implying that the fluctuation rate is as likely to sensibly move higher as much it is to trade sideways. Overall, Brent market prices are likely to fluctuate within a trading channel in coming weeks.