Two weeks after Trump’s ‘liberation day’, how have the oil paper and physical markets responded?

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Joey Daly:

Hello and welcome to the Oil Markets Podcast from S&P Global Energy. I'm Joey Daly from the North Sea crude desk. And in this episode, we'll be examining the impact of U.S. tariffs on both physical and paper oil markets from residual fuels to middle distillates.

On April 2nd of this year, the president of the United States, Donald Trump, declared Liberation Day after announcing a wave of blanket tariffs across 57 countries. The tariffs were shortly suspended for 90 days and importantly, ignored oil and energy products. But the impact on the markets has been unignorable for oil market players and prices across the globe tanked on fears of a recession.

In the seven days leading up to April 9, global crude oil benchmark Platts Dated Brent failed by nearly $15 a barrel or around 19% as China and the U.S. exchanged rounds of retaliatory tariffs. Only two previous shocks have caused larger week-on-week shifts in this crude price, namely Russia's invasion of Ukraine and the 2008 financial crisis. But of course, crude oil flat price doesn't paint a full picture.

And I'm here with two of our pricing experts to delve a little deeper into how Liberation Day has impacted oil markets. I'm joined by Joseph Jaffe who covers residual fuels here in London, and David Neef who looks after our middle distillates' derivative coverage.

So, Joseph, the tariff news is obviously shaken up markets everywhere, but let's start with the fuel sector. Can you give us a bit of a snapshot of the markets in the wake of these tariffs?

Joseph Jaffe:

Of course. So, what we're seeing at the moment is we're currently being exposed to a market which is very unpredictable. The volatility is now different compared to a few years ago, such as Russia's invasion of Ukraine which sent supply fears and shocks throughout the whole sort of wider crude and residual fuel landscape with supply fears.

Now, things are slightly different. It's more geopolitical and tariff-driven with market participants expressing a lot of uncertainty which has trickled down from the drops in the wider crude complex across the refined products. And now, market participants are expressing how they'll be careful to see how global trade is widely affected which will change conventional flows and demand pools from various sectors which will trickle down inevitably across the barrel.

And in particular, when looking at the marine fuel sector, market participants have expressed that they're seeing the market in a sort of wait-and-see kind of mode at the moment. In the residual fuel space, the high-sulfur fuel oil market has currently been experiencing a squeeze in high-sulfur material which meets finished grade specifications with a number of market participants reporting difficulties and product procurement.

This comes despite the recent arrival of Mexican product into Europe which currently contains a sulfur content of 4% which still requires blending before it can be commercially distributed to meet specification requirements.

The recent sort of cascade from the dip in crude prices, as you alluded to before, has had an impact on high-sulfur fuel oil flat prices, which has been falling amid tariff uncertainty which has made barrels particularly more attractive with underlying demand fundamentals still relatively firm with traders citing the lower flat prices will help demand.

In terms of for lower-sulfur fuel oil for 1% fuel oil, at the moment in the Mediterranean, the market's characterized by length with many utility shorts appearing to be covered and a closed arbitrage east has effectively been trapping 1% sulfur barrels in the region.

Joey Daly:

So, you mentioned the Med. And obviously these days, it's impossible to talk about-

Joseph Jaffe:

Yeah.

Joey Daly:

... the residual fuels sector in the Med without talking about the upcoming Med ECA zone which I believe takes effect on May 1st, right? It'd be interesting to hear how you're seeing the market dynamics from Med ECA interplay with the tariffs, right?

Joseph Jaffe:

Yeah. So, in terms of the Med ECA zone, this new regulation will impose a sulfur content cap of 0.1% on vessel emissions shifting demand away from 0.5 sulfur material towards more compliant fuels such as ultralow sulfur fuel oil and marine gas.

So, in terms of the effect of tariffs, it's hard to draw parallels at the moment in terms of what that impact will be in sourcing maybe different types of marine fuels. One school of thought which will enable market players to comply with this regulation will be scrubbing higher sulfur fuel oil down to 0.1%.

And with the tariffs imposed on the vast number of countries, as you alluded to at the beginning, we could see some interesting flows. For example, Mexican product which I touched on earlier with an increase in arrivals from Mexico into Northwest Europe and the Mediterranean now. And due to the length that I touched on just before of 1% sulfur material and due to sulfur blending linearly, we're hearing that the Med is no longer dependent on Northwest Europe in terms of sourcing product.

And consequently, we could see more high sulfur arrivals from Latin America, US Gulf Coast, in light of these tariffs since the Mediterranean which refineries and the terminals where they have capabilities to blend to maybe a 2%-ish sulfur content, we could definitely see some new demand channels emerging as the Mediterranean becomes more self-sufficient in terms of dealing with these arrivals.

Joey Daly:

Certainly. It seems like a pretty turbulent time in that market. How's the paper market looking for those products?

Joseph Jaffe:

So, in terms of the paper market, what we've seen is that the crack, high-sulfur fuel oil, 1% fuel oil being low-sulfur fuel oil and very low-sulfur fuel oil compared to the underlying Brent has had an inverse relationship.

So, as the underlying Brent price has cascaded, we've seen quite a lot of resilience from those cracks across the sulfur grades to the point where on April 10th, the front month for Rotterdam high-sulfur barge swap crack established a record high at minus $1.95 per barrel and has since been on an upward trajectory being most recently assessed at minus $1.38 per barrel up 19% on April 14th.

And this high-sulfur crack has been on an upward trajectory since the implementation of the tariff news or since the tariff news breaking. Yeah, this has marked its highest level on record since first began publishing assessments for the contract in 2006.

This has mainly been driven by an uptick in prompt demand amid a decline in prices for the outright swap, which has been a key contributor to the uptick in the crack with market participants hedging their exposure and capitalizing on the lower flat price.

Further contributing to this crack has been the expectations of a projected tightness in May where we're anticipating the emergence of Middle Eastern demand for cooling purposes to come into play. So, essentially, we've been seeing a resilient response to the initial news and this has trickled down across the sulfur grades with cracks edging higher across the board.

Joey Daly:

So, it's been a pretty strong market?

Joseph Jaffe:

Yeah, you could say in terms of, obviously, underlying flat prices has come down, but the cracks have told a different story which may be slightly different to what we were exposed when those two huge geopolitical events, as you mentioned with Russia and Ukraine and the wider shockwaves that sort of emerged after the financial crisis in 2008.

Interestingly as well, the spreads between the sulfur grades have been a point of interest when looking at these markets. And they've really shone through the current fundamentals with seeing the high-low spread. The differential between the front month from Rotterdam barge swap and the equivalent from Northwest European low-sulfur cargo swap has been hovering around low levels. Coupled with this Mexican product into Northwest Europe which we touched on having a high-sulfur content of around 4% has actually started to pull more low-sulfur and mid-sulfur components into the high-sulfur blending pool, providing some support for low-sulfur fuel oil.

So, some sort of macro-factors I would say in terms of the tariff uncertainty having a trickle-down effect coupled with some of the fundamentals have been reason to explain some of these movements in the paper market.

Joey Daly:

Yeah, I see. So, I mean, let's take the conversation up the barrel a bit now. So, as I mentioned, I'm here with David. Now, David, you look after our middle distillate swaps coverage. Are you seeing some of the same patterns Joseph just described in your markets?

David Neef:

Yeah. So, I'll start off with the low-sulfur gas oil futures. And that market saw a significant declines since the tariffs were introduced. Now, of course, it started April 3rd where the front month futures contract fell over 5%. And then on the second day, it also was a little over 10% since the tariffs' announcement.

Now, the open interest data in low-sulfur gas oil showed a divergence between front months and later months. So, later months, roughly between February 2027 and January 2028 contracts, that saw significant increase in open interest. So, that basically indicates a shift towards long-term positions as traders were hedging against future market conditions, right?

And after I talk a bit about jet swaps and diesel swaps, I'll go into a bit about the market sentiment basically from all of this. But looking at jets of Northwest European cargo swaps, the market also reflected a bearish trend in differential swaps now as a result of the tariffs.

But here, open interest showed a significant activity between July 2026 to December 2027, those contracts. So, definitely a notable increase in interest for longer term contracts. And this is where major players basically were eager to take advantage of the reduced prices as a result of the decline, right?

But despite the overall market weakening in jet fuel, the physical market for jet fuel appears quite balanced in Europe. There's healthy flying demand. You have also refineries in the Amsterdam, Rotterdam, Antwerp region maximizing jet output. And while March did see a dip in imports from East of Suez, heavier imports are expected later this month than April.

And of course, looking at 10 PPM diesel swabs, fan favorite in the middle distillates, of course, it was pretty much quite a similar pattern. So, that includes 10 PPM FOB ARA, 10 PPM CIF Northwest, and also CIF Mediterranean. So, all of those, we're seeing weakness as a result as well.

Now, the front month differentials of course were falling. But later in the week, last week, we were beginning to see a bit of recovery. But overall in the physical market for diesel, it did weaken throughout the week. Diesel and gas oil imports are projected to reach 4.5 roughly million metric tons in April. So, that's down about 40% from last month in March. And lower prices have also been driving increased inland demand as the agricultural season begins very soon.

So, as a result of all of that, what are basically market sources saying about what happened after last week? So, market sources have been saying that while swaps at the front of the curve closely followed the physical market, there has been notable buying and hedging activity in the backend structure, as I mentioned earlier. So, basically, major players seem keen to capitalize on the lower prices resulting from the tariff-induced downturn.

But out of my curiosity, kind of seeing something like this, I was curious to ask several sources somewhat of a comparison with this basically market crash, right? So, I was curious to understand their thought process and comparing it to something similar in comparison, which in recent years made the headlines we were talking about, the COVID-19 pandemic market crash.

Joey Daly:

Yeah, yeah.

David Neef:

So, comparing the current situation to the COVID-19 market crash, some sources basically emphasize that these two events are just fundamentally different. The COVID-19 crash was perceived as a longer term crisis due to the pandemic's potential for extended disruption.

Now, in contrast, the current fluctuations driven by the U.S. tariffs are seen as a basically short-term phenomenon according to them, now with the potential for tariffs to be lifted at any moment. And this basically contributed to a different market outlook.

However, other sources expressed concerns about the U.S. dollar and treasury yields. Now, typically, treasury yields decline during market downturns as they're viewed as a safe haven basically. Yet this time, yields have remained high. So, this raised questions about investor confidence according to sources.

Now, this unusual trend could indicate deeper macroeconomic issues. It basically suggests that market participants may be reassessing their long-term strategies. So overall, while there is cautious optimism in some quarters regarding potential recovery, the uncertainty surrounding trade policies and economic indicators will likely keep market participants on their toes.

Joey Daly:

Yeah. That seems to be really a key feature of these recent headlines is just that uncertainty, right? I've had sources say to me that these markets are borderline untradable because you just never know what that next headline is going to say. We already saw the tariffs came out and then within a few days, all of a sudden there was a 90-day reprieve. So, yeah, it really seems uncertainty is what's driving a lot of these movements.

And thanks very much for going into these details because it's easy to take a look at the headlines as someone in our oil space and just see flat price tanking and think that's the whole story. But it's clear from these last couple of minutes that that's not the whole story and there's a lot more at play here than just multiyear lows on flat price, right?

Joseph Jaffe:

Yeah, for sure. And it'd be interesting to get a snapshot of a perspective from you in terms of hearing how that crude market has responded initially. Obviously, in the news, we've been seeing that price tanking and it would be good to get a bit of color on ...

Joey Daly:

Yeah, yeah, certainly. So, I'm typically covering, as you guys know, North Sea crude of Platts. And something that we've heard from our sources has been that despite these flat prices crashing, these are for things like ICE Brent Futures and for Cash BFOE. These are forward contracts, right? Their delivery is two months ahead. Those have obviously collapsed essentially.

But despite this, there's still been tightness in the prompt because these tariffs, they're not affecting the immediate market for the ... Let me say that again. Because these tariffs aren't directly impacting the prompt market, so things have actually stayed quite strong and are set to stay quite strong ahead of things like summer driving season as European refineries come out of demand.

So, prompt traders aren't paying too much attention to the tariffs. So, it's been interesting to see that dichotomy because then you go further back and obviously the prices, the bottom's falling out and ... Well, maybe not quite, but it's extremely low. So yeah, as we say, it never tells the full picture just what that big flat price move.

Joseph Jaffe:

And I think also an interesting element to this news is the element of how headline driven these markets have been and how difficult and uncertain market participants have expressed it is to operate in these environments. As one day or one minute, you can be sitting at your desk, grab a coffee, come back, and next thing you know, Donald Trump's tweet something and ...

Joey Daly:

Or Katy Perry's been blasted into space which is what caught my eye yesterday. And you just never know what's going to happen.

Joseph Jaffe:

For sure. You never know what's going to happen.

Joey Daly:

So, I think that's probably all we've got time for on this podcast. Thanks all for listening and I hope that's been informative and I hope that's sort of peel the way some of the layers of the markets.

Thank you, Joseph. And thank you, David. And thank you for listening to what has been another fantastic episode of the Oil Markets Podcast with S&P Global. Goodbye.