TD Securities’ Ryan McKay and Bart Melek highlight that crude Oil and petroleum product flows from the Middle East have rebounded sharply, but this surge is seen as temporary as trapped Gulf barrels clear. Despite higher exports and some production recovery, they estimate a sizeable crude plus product deficit and expect a tighter market through summer, arguing this underpins a strong setup for higher Oil prices even as CTAs have been marginal sellers.

Summer tightness underpins bullish setup

"Energy flows pick up. Despite what appeared to be a shaky first few days of negotiation with plenty of talk of Hormuz being re-shut, we have seen crude oil and petroleum product flows average roughly 7m b/d last week, while starting this week at near 9m b/d."

"However, this kind of elevated flow is only expected to last a couple of weeks as the crude and product that have been trapped on water in the Gulf continue to exit. Elsewhere, our high frequency estimates of Middle East production have topped 17m b/d in recent days (approx 11m b/d shut in), suggesting a recovery of 2-3m b/d in July could be possible at current pace."

"Even with the currently elevated flows, our rolling crude plus product deficit sits at near 3.5-4m b/d, and is likely to deepen as the readily available floating supplies run out, alongside a likely slowing of SPR release into July."

"CTAs have been marginal sellers across the energy complex, but managed money shorts in brent crude have hit extreme levels."

"As the market ultimately remains tight throughout the summer, the set-up for higher oil prices remains very strong."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)