Texas Production Makes A Comeback


Oil prices have started to make their downward correction, with the worst of the US big freeze now behind us, and US producers starting to bring back crude oil production. It may take refiners a little bit longer to get back up to speed, following the cold snap and power outages. As a result, product cracks are likely to remain fairly well supported until we see refinery operations returning to normal.  There are suggestions that it could take some weeks for this to happen. Given the refinery outages, crude input to refiners will likely suffer, and so in the weeks ahead, we could see some fairly large crude oil stock builds.

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Last week, President Biden said that the US would rejoin the Iranian nuclear deal if Iran returns to full compliance with its terms. However, before that happens Iran has said it wants the US to lift sanctions imposed under President Trump. While a quick lifting of sanctions and a return of Iranian barrels would put some downward pressure on prices, current developments suggest that it will take some time for an agreement to be made. In our balance sheet, we continue to assume that we will start to see the return of Iranian supply over the second half of this year.

Finally, next week will see OPEC+ meet in order to decide what they will do with production levels. As usual, noise in the lead-up to the meeting has started to get louder, with media reports that Saudi Arabia is keen for the group to take a cautious approach, and keep output steady. Unsurprisingly, given the rally in the market, Russia is keen to relax production cuts further. However, both Russia and Saudi Arabia will want to avoid a repeat of their meeting in March last year, where they failed to come to an agreement, which saw the previous deal fall apart.


The recent rally in base metals has been primarily macro-driven; Copper led the rally last week, thanks to growing inflation expectations. Developments in the LME market are only providing additional optimism and reinforcing expectations that the market has tightened significantly and is moving towards a squeeze.  As of last Friday, the LME frontend spreads tightened further, with the cash/3M spread surging to a backwardation of US$37/t (the highest since last September), and the tom-next spread jumped to US$20, a level last seen in mid-2019.

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