Brent Crude OilBrent crude oil had quite the month in July, climbing from $74 per barrel all the way up to $85. This price jump came from Russia cutting back on exports to Saudi Arabia, trimming all their oil production. Still, I don't think the price is going to burst out of its range of $72 - $88 per barrel yet.
What's interesting is the strengthening of "crack spreads"
Now you may be wondering what "crack spread" is. It's basically the difference between the buying cost of crude oil and the selling price of the final products, such as gasoline and diesel. There has been a significant increase in the crack spread for RBOB gasoline due to a production mismatch with the total demand and exports.
Although there was a decrease in demand in July, the low inventories of gasoline at a five-year low and diesel at a multi-decade rock-bottom level have helped maintain prices for refined products. Add to this mix a hike in jet fuel demand, mostly driven by China's international travel sector.
There's more. Due to the hot summer heat reducing shipping capacity along the Rhine River, European refineries might need to cut back production. This could prompt the U.S. to ramp up the export of key industrial fuels.
The Rhine River in Europe, vital for transporting fuel & goods, is running into some trouble. Water levels in a part of the river (Kaub chokepoint) are the lowest they've been in 30 years. That's not good because if the water's too low, the big boats (barges) can't get through.
Low water levels halted the barges last summer & may happen again without adequate rainfall. This impacts the delivery of critical goods (heating oil fuel)
Barges moving heating oil fuel from Rotterdam saw their cargo loads nearly cut in half from 2000 to 1200 tons within a week. Less water and harder access mean using barges is getting more expensive.
So a river that's too dry for boats to pass through properly could cause many problems with getting goods around Europe & might even make things more expensive. The inflation battle isn't over in Europe.
Now for those keeping an eye on inflation. As gasoline prices rise in tandem with crude oil, it inevitably drives up the price of pretty much everything. Diesel demand reflects the overall economy's well-being but has fluctuated throughout this year.
If there continues to be poor economic data from the US, China, and the EU, we could very well be starring down the barrel of a recession (pun intended ).
This is why limit the current price ceiling to the high $80s for crude oil.
The strength of crude has reached the upper limit of our forecast range and is still within the range of $72 to $87.
If it breaches $88, it may reach $95 and have a greater impact on refined products. However, concerns about a recession will likely keep a limit on the price for now.
The long-term impact of refinery shutdowns over the past 3 years and the current state of inventories is worth noting. If a recession hits and refinery runs dip, rebuilding inventories will be a severe challenge unless demand drops off a cliff.
There's a catch-22; central banks are trying to cause that drop by hiking interest rates. The downside is that these higher rates can deter drilling and exploration for new oil and gas, further compounding the problem down the line.
This is a vicious cycle. Destroying your economy to tackle inflation is like cutting off your arm because a paper cut is not something I would recommend.
I expect Brent will trade between $72 and $88 per barrel until Q4. After that, don't be surprised if it creeps close to the $90 mark.
As outlined in my blog I published on August 5th 2023
