TD Securities strategists Ryan McKay and Bart Melek report that Commodity Trading Advisors (CTAs) are currently maximally long on WTI Crude, Brent Crude, diesel, and gasoline, reflecting a significant upside risk premium in the market due to ongoing attacks on energy infrastructure in Saudi Arabia and Russia [1]. The strategists highlight that supply risks remain elevated following damage to Saudi Arabia's East-West pipeline, with reports suggesting that much of the system could be out of service for three to five weeks. The potential for further Houthi strikes adds to the tightening risks in the market [1].
The report notes that upside risks across crude oil and related products are 'extremely elevated' as a result of these attacks in the Middle East and Russia. CTAs' maximum long positions are currently only constrained by volatility levels, further supporting the upside risk premium in crude oil pricing [1]. Additionally, continued Ukrainian attacks on Russian refineries are tightening the diesel market [1].
While the market has recently been more balanced, with crude flows from the broader Middle East region reaching 80-90% of pre-war totals, the risk premium remains due to the possibility of further attacks limiting supply or a recovery in refinery runs, particularly if Chinese demand increases [1]. The strategists caution that if pipeline repairs extend beyond the expected timeframe, if flow rates are significantly reduced, or if additional attacks occur, the market could tighten materially [1].
CONCLUSION
Crude oil markets are currently pricing in a significant risk premium due to ongoing infrastructure attacks and supply disruptions, with CTAs maintaining maximum long positions. The outlook remains highly sensitive to further developments in the Middle East and Russia, as well as potential shifts in refinery activity and demand.