World of Oil Derivatives

In this episode of The Officials, Jorge, Ed, Harinder and Dr. Wu explore the latest trends in global energy dynamics and political shifts, and deep dive into the rapidly changing landscape in China - where electric vehicles (EVs) are taking over, significantly impacting gasoline and diesel demand. They discuss startling stats, the shift to EVs in major Chinese cities, the competitive tech race, and the broader economic implications - including substantial reductions in daily transportation costs.

The Officials also tackle the dilemma OPEC faces, balancing production cuts amid declining Chinese demand and potential price impacts.

The discussion moves to the geopolitical sphere, dissecting President-elect Trump's cabinet nominations and their implications. They discuss trade tariffs that could disrupt European economies and drive deglobalisation and analyse how these political manoeuvres might influence global oil prices and the economic strategies shaping the energy markets.

The Officials also explore what a strengthened dollar means for investors, speculate on Musk's influence, and examine how upcoming policies could affect both the U.S. economy and international relations.

Welcome to the second episode of Oil Insights, hosted by Harry Tchilinguirian, Head of Research at Onyx, alongside co-hosts Mita Chaturvedi and Vincent Wu, members of the research team at Onyx.

The oil market started last week on a strong note, only to finish on a whimper trading sub-80s last Friday. Geopolitics early last week did help uplift prices, with fund positioning ready to add some more risk. But geopolitical premia seemed to deflate as diplomatic efforts were stepped up to try to secure a cease-fire in Gaza.
The positive economic news from the US, such as strong retail sales, provided some optimism, but the main focus remained on China's weak economic data. China's industrial production, retail sales, in fixed investment were disappointing, alongside weaker crude runs and oil imports. US oil data from the EIA also showed an unexpected crude stock build, further pressuring oil prices.

Brent remained stable, with no significant signs of change in supply. China reduced gasoline and diesel exports in July, and its refineries are likely to operate below expectations due to weak demand and export constraints. The future of crude demand in China and Asia is crucial, especially with OPEC+ potentially increasing supply in Q4. Refining margins are also struggling, particularly with gasoline and diesel.

As for swap market pricing, the DFL still remains quite strong, although slightly weak compared to this time, last week. It’s seen a combination of short-covering rally as well as, Trade Houses and Majors buying in the physical window, which drove up physical differentials indicating demand in the spot market in the near term.

Middle distillates have been interesting this week, with gasoil pressured due to the poor economic picture, seeing a poor economic picture across China, the United States, Europe and especially Germany, with extremely weak PMI data and industrial production.

Macro Specialist James Brodie and Research Analyst Harry Nedeljkovic weigh in on the latest news in the presidential campaign, discussing who the Democratic Party will select as a replacement for Joe Biden as their candidate, who will likely be chosen as a running mate, how Donald Trump’s could react, and subsequently how these critical decisions may affect markets.
US June retail sales remain unchanged (0.0% m/m; est. -0.3%) while industrial production is up +0.6% m/m (est. +0.3%). Powell said yesterday “Now that inflation has come down and the labour market has indeed cooled off, we’re going to be looking at both mandates.” Looking at other US data, jobless claims are trending higher.
The Chinese central bank also unexpectedly cut key lending rates to new record lows at the July fixing to aid the country’s fragile economic recovery following weak Q2 GDP readings. In Japan, the yen continued its rally to below 157 per dollar, however, the Nikkei fell 1.16% on Monday morning to 3-week lows.
In the US, the Nasdaq had its worst day since 2022 last week, whilst the S&P 500 has now gone 350 trading days without a 2% correction (the longest since February 2007). According to GS Prime, the hedge fund de-grossing activity over the past 5 sessions is the largest in 20 months and ranks in the 99th percentile over the past 5 years.
Canadian CPI has fallen to 2.7%, with the probability of rate cuts for July 24th having now risen to 90%.
The chart of the week this week is Nvidia, with critical support at 117.80.
Key data releases this week:
Tuesday; GFK Consumer and IFO Business sentiment
Wednesday; Eurozone Manufacturing & Services PMI
Thursday; Q2 advance GDP (2% expected annualised)
Friday; Core PCE (est. +0.1% m/m, 2.4% y/y; prev. 2.6%)

Brent crude prices have had a strong week, continuing to rally at $87/bbl. The latest CFTC data indicates that the market has become balanced and neutral in positioning. This presents an opportunity for bullish investors to take action, with legacy positions and new entrants supporting this trend.

However, macroeconomic news doesn't fully support this bullish outlook. Economic data from China and the US is weak, with China's manufacturing sector contracting for the second consecutive month and service activity dropping to a five-month low. Additionally, central banks intervening in the bond market as yields hit all-time lows signal potential global economic challenges.

Regarding refinery margins, Martha raises a question: how far into the summer driving season must we go before the market reacts? Currently, refinery margins have increased by about a dollar, with crude and product prices also rising.

Gasoline prices remain unstable and sideways, suggesting the potential for shocks given the unusually low-price levels and poor liquidity. This instability might lead to gappy price action. Last week, RBOB saw the highest level of short positions by money managers in five years.

The team also discusses the big story of the week: Senate Budget Committee Chairman Sheldon Whitehouse (D-RI) has initiated an investigation, demanding answers from the CEOs of 18 oil producers regarding potential collusion with OPEC to artificially raise prices for American consumers and increase federal government costs.

If you would like to connect with any of our hosts on LinkedIn, please click on the hyperlinks below:

Greg Newman: https://www.linkedin.com/in/oilderivatives/

James Brodie: https://www.linkedin.com/in/jamesbrodiecmt/

Martha Dowding: https://www.linkedin.com/in/martha-dowding-ab84801a6/

Vincent Wu: https://www.linkedin.com/in/vincent-wu-099816125/

Chapters for this episode are:

0:00 Welcome

0:28 Brent Futures

1:50 Macro market news

6:21 Refinery margins & products

15:14 China & US economic data

19:24 "Googling oil:" world oil news

23:22 Poll results

26:08 Global elections & the markets

29:20 Outro

On today's episode, James Brodie and James Todd dive into the latest macroeconomic developments shaping global markets. The U.S. housing market faces steep challenges as mortgage applications drop by 17%, and the 30-year mortgage rate hits 7.25% - the highest since July. Across the Atlantic, UK house prices show slower growth at 0.3% month-on-month.
They also cover key updates from the Federal Reserve, with Atlanta Fed President Raphael Bostic emphasising that rate cuts are not imminent despite a strong labour market and declining inflation.
In China, the government moves to double its loans for unfinished properties to $562 billion in efforts to stabilise the housing sector, while liquidity measures and interbank rates signal ongoing stress in the financial system. With China’s credit growth slowing, they explore what this means for global investors.
As the U.S. election draws closer, they examine Trump’s growing lead in prediction markets and discuss the impact on the financial landscape as well as Elon Musk's controversial support for Trump’s 2024 presidential campaign.
Finally, tune in for insights into the crypto market as Bitcoin trends higher but faces resistance at $71,800 and $73,800.