What is driving the oil prices higher?

Crude oil prices have surged over the last two weeks, with Brent and WTI Futures gaining around 9% and trading at $84.89/bbl and $81.27/bbl, respectively, at the time of writing.

Despite the OPEC+ headlines in recent months, oil prices have remained relatively stable. So, what has changed and what is driving the prices higher?

Needless to say that the material change from the OPEC+ cuts are kicking in now on a global scale. But I'd like to attribute this strength to the robust performance of refined products, especially Gasoline and Diesel, with US benchmarks playing a crucial role. Interestingly, the strength in these products was observed a week earlier (on July 10th) than in crude, with RBOB and Heating Oil cracks breaking away from the 20-day and 50-day moving averages.

I leave it up to the reader to provide some fundamental stories to justify the product rally (clues: refinery outages, ease of recession fears, driving season demand, HURRICANE etc). I will focus on money manager positioning, which has been on the buy side of Gasoline and Diesel since the beginning of July. This strategic move appears to be paying off, especially after months of disappointment with getting long oil-related assets in 2023:

Another noteworthy aspect is the correlation between refinery margins and Gasoline/Diesel prices. Margins are strong and there is better selling from Prod/Merc category in these products, but their contribution has not been sufficient to put a lid on the prices yet. For the correlation, Gasoline/Diesel cracks are very much correlated to the margins (as they should) but one observation that is rare, is the 90% correlation between these product cracks and crude.

To reiterate, products are rallying due to money managers' purchases in the last four weeks, and crude prices are following this upward trajectory with margins strong globally. "But why do you say this is US driven?"

Looking closely at the most liquid crude arbitrage contract, WTI/Brent, provides an answer.

A week after the US product strength, WTI/Brent broke the -$4.40/bbl resistance, reaching a high of -$3.90. Normally, these contracts are over 95% correlated most of the time with the differential stable. However, the US products' benchmarks have taken charge, causing WTI to outperform Brent in this ascent. The structure of the curve also reflects this trend, with the gap between Oct23/Oct24 WTI and Brent Futures widening.

Now, you might be wondering, "So what? What should I do with this commentary?"

The current state of the market suggests that crude oil prices are driven by Gasoline and Diesel prices in the US. Money managers' positions hold significant length in these products, and such substantial price increases are typically not sustainable over a long period. It is likely that they will need to book some profit on their products' long positions at some point. If you are actively trading oil, I advise keeping a close eye on any indications of such flows entering the products' market as this should impact the crude benchmarks significantly.