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Brent Supported by Gulf Supply Disruptions, Tight Fuel Markets, Macquarie Says

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Brent's recent rebound of about $20 per barrel from early July lows should keep crude prices supported over the next few weeks as Gulf supply declines, Vikas Dwivedi, Global Energy Strategist at Macquarie, said.

Dwivedi noted that the rally comes even though earlier supply surges during the interim memorandum of understanding period have largely satisfied near-term demand.

The analyst said a renewed geopolitical risk premium and a short squeeze have driven the recent oil rally.

Dwivedi sees a moderate chance of limited escalation but a low risk of broader conflict absent "a serious miscalculation by either side."

He expects refining margins to remain elevated as limited processing capacity keeps fuel markets tight.

The analyst attributed the tightness to four potential sources.

Russian refinery runs have dropped to 3.5 million barrels per day, their lowest level in 20 years due to Ukrainian attacks.

Other factors contributing to this tightness include the US Gulf Coast hurricane season posing outage risks, unseasonably high temperatures impacting European refinery outages, and lower Indian gasoil exports.

"The ability to resupply global product markets could be limited as the majority of global spare capacity sits in Asia, predominantly China," the analyst said.

However, Macquarie expects lower export quotas will likely limit additional Chinese fuel shipments, keeping refined product markets tight over the near term.

The firm said refined product markets saw material tightness, with diesel and gasoil markets tightening the most.

About 20% of global seaborne diesel supplies are constrained by Strait of Hormuz disruptions and Russia's export ban. African, European and South American buyers now compete more aggressively for US exports, it added.

The firm said oil flows through the Strait of Hormuz have slipped near April levels, with the seven-day average for crude, condensate and clean products at about 3 million b/d, or 16% of the January-February pre-conflict average and roughly one-third of memorandum of understanding-period volumes.

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