Eyes on the product markets as oil retraces much of yesterday's gains

<p>Oil backed off today with WTI crude settling $1.99 lower at $91.67.</p><p>TD today touched on the big question in the oil market, presuming that OPEC+ will continue to tighten the screws: When does demand destruction happen. Much of the debate around that is about historical price levels and that just doesn't resonate with me because the dollar has lost so much of its purchasing power. I mean, how many loaves of bread does it take to buy a barrel of oil compared to 15 years ago? </p><p>In any case, here is TD:</p><blockquote> "An emerging investor question is the oil price at which demand starts buckling. We
consider this very difficult to answer, given numerous, constantly shifting variables
within the demand equation (i.e., demand elasticity extends well beyond oil price, and
the relative importance of different variables changes over time). However, should
spot Brent prices break through US$100/bbl, demand erosion likely emerges as
a dominant concern with investors, especially given the fragility of certain global
economies."</blockquote><p>I'll take the over on that estimate and put it at $120 brent but there's no real way of knowing until it happens. China alone can swing demand with the wave of a pen via quotas and that's exactly what happened today with lower product export quotas (meaning less demand for crude to refine and export).</p><p>Part of what makes that such a hard question to answer is cracks. Consumers don't buy crude oil, they buy gasoline, diesel, jet fuel and plastics. The spreads between oil prices and products have been volatile this year and there's good reason to think more of that is coming, particularly with Russia indefinitely banning product exports.</p><p>In addition, maintenance is going to be heavy this quarter due to covid postponements. That means any accidents at refineries could dramatically tighten the market. Diesel is particularly tight and the forward curve shows that it's expected to stay that way.</p><p>In addition, US product inventories are relatively low and will further tighten this quarter due to maintenance and rising exports.</p><p>This will all put a great deal of pressure on the struggling manufacturing and transportation sectors. Moreover, this looks to be a problem that could last years with 4.1 mmbbl/d of the global refining capacity that has been shut or is scheduled to be closed over the
next 1-2 years.</p>

This article was written by Adam Button at www.forexlive.com.