Phys­i­cal oil mar­ket tight­ens as re­fin­ers scram­ble for crude

Kuwait Times - - BUSINESS -

LON­DON:

Phys­i­cal crude mar­kets are at last show­ing signs of tight­en­ing as record re­fin­ery con­sump­tion in the United States co­in­cides with a slow­down in oil ex­ports from the Mid­dle East Gulf.

US re­finer­ies pro­cessed an av­er­age of al­most 17.3 mil­lion bar­rels of crude per day last week, an in­crease of 620,000 bar­rels per day (bpd) com­pared with the same week in 2016. Fuel con­sump­tion by US mo­torists re­mains largely flat but US re­finer­ies are see­ing higher de­mand for gaso­line and diesel from Latin Amer­ica where sup­plies have been hit by lo­cal re­fin­ery prob­lems.

Re­fin­ery crude con­sump­tion re­mains high in most other ge­o­graph­i­cal mar­kets in an in­di­ca­tion fuel de­mand is grow­ing strongly, es­pe­cially in emerg­ing economies. OPEC ex­ports have been ris­ing as a re­sult of in­creas­ing out­put from Libya and Nige­ria, which are not capped un­der the or­ga­ni­za­tion’s pro­duc­tion deal, and poor com­pli­ance from some mem­bers.

But Saudi Ara­bia has been re­strict­ing ex­ports in re­cent weeks and has stated ex­ports will be be­low 6.6 mil­lion bpd in Au­gust, com­pared with 7.3 mil­lion bpd in Au­gust 2016, and the low­est for the month since 2010. Saudi Ara­bia and Iraq both tend to ex­port less dur­ing the sum­mer be­cause they use more crude do­mes­ti­cally to burn in power plants to meet air-con­di­tion­ing de­mand.

So some of the slow­down in Saudi ex­ports may be sea­sonal, but of­fi­cials are keen to frame it as a de­lib­er­ate pol­icy to ac­cel­er­ate the re­duc­tion of global oil stocks. Saudi sources have said ex­port al­lo­ca­tions to the United States, Europe and Asia will all be cut sharply in Au­gust.

The prospec­tive re­duc­tions have left re­fin­ers scram­bling to find re­place­ment crude which is tight­en­ing the phys­i­cal mar­ket for all grades. De­mand for medium and heavy crudes, with a high yield of mid­dle dis­til­lates, has been strong since the start of the year, help­ing nar­row the light-heavy dif­fer­en­tial.

But in­ten­sive re­fin­ery runs dur­ing the sec­ond and third quar­ters have seen strong de­mand for light crudes as well, tight­en­ing the mar­ket for light oils, even as sup­plies from North Amer­ica and Africa have in­creased. One con­se­quence is that com­mer­cial crude stocks in the United States have fallen more rapidly than nor­mal at this time of year and are now be­low year-ago lev­els.

The tight­en­ing sup­ply-de­mand bal­ance has been re­flected in a sharp im­prove­ment in the cal­en­dar spreads for Brent crude for the re­main­der of 2017 and through 2018. The Brent spread be­tween Septem­ber and Oc­to­ber 2017 has tight­ened to just 3 cents per bar­rel con­tango on Thurs­day, from 32 cents per bar­rel in the mid­dle of June. Other in­ter-month spreads have also tight­ened sig­nif­i­cantly with a tighter con­tango in­di­cat­ing traders now ex­pect a lower level of in­ven­to­ries through­out the pe­riod. The phys­i­cal crude mar­ket now looks sig­nif­i­cantly tighter than it did in the first half of June, which has co­in­cided with a re­newed rise in bullish hedge fund po­si­tions and a mod­est rise in spot prices. The crit­i­cal ques­tion is how much of this im­prove­ment is sea­sonal and how much will be sus­tained once sum­mer is over. —Reuters

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