Core Market View: Neutral stance with declining volatility levels, trading patterns returning to fundamental analysis. Limited probability of near-term macro and geopolitical catalysts materializing, with absolute pricing maintaining range-bound approach.

Powell's renewed dovish signals combined with Trump's intervention in Federal Reserve personnel policies have heightened expectations for future rate cuts. Against the backdrop of expansive U.S. fiscal policy, the Fed's independence faces further erosion as monetary policy aligns with fiscal expansion. This suggests structural liquidity abundance in the U.S. dollar over the medium to long term. From a positioning perspective, current bearish sentiment may be overdone, creating potential for significant upward rebounds as short positions unwind.

On fundamentals, current valuations appear reasonable with modest macro support. Despite some weakening in the spot market amid low inventory levels and high profit margins, conditions haven't reached excessive trading territory. Month spreads have priced in upcoming seasonal weakness, with event-driven trading focused on hurricane disruptions. In refined products, attacks on Russian refineries and delayed Atlantic coast refinery restarts have caused unseasonable strength in Atlantic gasoline and diesel crack spreads. If margins sustain these levels, European and American refinery maintenance schedules may be lighter than expected, further impacting backwardation.

Market Factors Assessment:

OPEC Production: Bearish outlook as September production increases further, with Saudi Arabia seeking additional Asian OSP price reductions to capture Russian crude market share.

Macroeconomic Environment: Bullish bias from Powell's dovish stance continuing to support September rate cut expectations.

Strategic Petroleum Reserve: Neutral positioning with U.S. SPR restocking at 30,000-50,000 barrels daily, maintaining gradual low-price inventory building.

Geopolitical & Sanctions: Neutral stance with no major variables currently, monitoring ongoing Iran situation developments.

Downstream Demand: Bearish trend as unplanned refinery outages strengthen Atlantic region gasoline and diesel crack spreads, while maintenance remains seasonally driven.

Shale Oil Production: Neutral outlook with weekly output at 13.44 million barrels daily, rig count stable at 412 units. Rig count shows downward trajectory that should gradually translate to production decreases.

Powell's Dovish Resurgence

Recent Federal Reserve developments warrant attention: Powell's dovish Jackson Hole speech and Trump's pressure on Fed Governor Cook, further undermining Fed independence.

Powell indicated rising downside employment risks while upside inflation risks have significantly diminished, potentially warranting policy stance adjustments that markets are pricing for rate cuts.

Regarding Trump's Fed pressure, historical analysis shows Fed independence typically weakens during "big government" fiscal periods. Similar to President Nixon's pressure on Chairman Arthur Burns in fall 1971 ahead of the 1972 election, current expansive fiscal policy combined with potential monetary accommodation suggests trending dollar liquidity abundance.

End of AIT Era

Average Inflation Targeting (AIT), introduced by the Fed in 2020, allowed inflation above 2% following periods below target to achieve long-term average goals. Since Bernanke's initial 2012 2% inflation target, core PCE mostly ranged between 1-1.8% until Powell's 2020 AIT implementation allowing temporary overshoots to compensate for prolonged weakness.

The Fed has formally abandoned AIT, returning to traditional 2% inflation targeting. This adjustment reflects post-pandemic high inflation environment changes, though market reaction remains muted as AIT had become largely ineffective. This also demonstrates the Fed's employment mandate typically superseding inflation concerns given employment's greater controllability.

Current Rate Cut Baseline

Considering rate cut expectations, projected annual easing has increased to approximately 55 basis points.

Market data indicates two rate cuts this year, scheduled for September and December, each at 25 basis points.

Fundamental Expectations Continue Weakening

North Sea Backwardation Persistent Weakness

Fundamental weakness is gradually shifting from month spreads to backwardation, with fundamental realization becoming increasingly apparent.

As of August 28, CFD and DFL closed at -$0.19/barrel and $0.65/barrel respectively.

Seasonal Demand Decline Approaching

U.S. and Chinese refineries are entering autumn maintenance periods, with demand showing clear trending weakness.

Globally, recent unplanned outages primarily involve attacked Russian refineries (approximately 1.47 million barrels daily), though seasonal maintenance plays the dominant role.

High Inventory and Warehouse Receipt Pressure Causes Continued SC Undervaluation

Since early August, domestic SC prices have remained consistently undervalued versus Brent, primarily due to high inventory levels and warehouse receipt pressure transmission to futures amid approaching major refinery maintenance.

Looking ahead, Middle Eastern crude's continued push to capture Russian crude's Asian market share maintains strong fundamental pressure, with limited near-term pressure relief probability.

Price Differentials & Positioning

SC Weakness More Pronounced Under Warehouse Receipt Pressure

As of August 29, WTI near-month spread closed at $0.53/barrel with 1-6 spread at $1.6/barrel; Brent near-month differential at $0.64/barrel with 1-6 spread at $1.9/barrel; SC near-month spread at -8.1 yuan/barrel.

Gasoline crack spreads continue strengthening while diesel markets show East-West divergence and jet fuel cracks marginally weaken.

WTI fund net long positions decreased as of August 19 week, with long positions down 674 contracts, shorts up 20,750 contracts, reducing net long by 21,420 contracts.

Brent fund net long positions also decreased, with longs down 21,410 contracts, shorts up 1,513 contracts, reducing net long by 22,930 contracts.