Mar­ket sends OPEC warn­ing: Rout might not be over

Kuwait Times - - Business -

LON­DON: As OPEC watches a near 15 per­cent drop in the oil price in three weeks, im­por­tant in­di­ca­tors in the phys­i­cal crude mar­ket are flash­ing wor­ry­ing sig­nals that the de­cline might be far from over. The con­cerns come not from the heav­ily traded fu­tures mar­ket, but from less trans­par­ent trad­ing ac­tiv­ity in crude oil and other prod­ucts mar­kets, where key U.S., Euro­pean and Rus­sian crude prices have fallen of late, sug­gest­ing less ro­bust de­mand.

Bench­mark oil fu­tures have plunged in re­cent days to­gether with global stock mar­kets due to con­cerns over in­fla­tion as well as re­newed fears that rapid out­put in­creases out of United States will flood the mar­ket with more crude this year. OPEC, in­clud­ing its Sec­re­tary Gen­eral Mo­ham­mad Barkindo, ar­gue the de­cline is just a blip be­cause de­mand is ex­ceed­ing sup­ply and will guar­an­tee prices won’t plunge again to $30 per bar­rel as they did in 2015 and 2016.

Tra­di­tion­ally, when oil fu­tures de­cline, prices in the phys­i­cal mar­kets tend to rise be­cause crude is be­com­ing cheaper and hence more at­trac­tive to re­fin­ers. But in the past weeks, dif­fer­en­tials in key Euro­pean and US mar­kets such as North Sea For­ties, Rus­sia’s Urals, West Texas In­ter­me­di­ate in Mid­land, Texas, or the At­lantic diesel mar­ket have all fallen to multi-month lows. The rea­sons tend to be dif­fer­ent for most phys­i­cal grades but over­all the trend paints a bear­ish pic­ture. “Phys­i­cal mar­kets do not lie. If re­gional ar­eas of over­sup­ply can­not find pock­ets of de­mand, prices will de­cline,” said Michael Tran from RBC Cap­i­tal Mar­kets. “At­lantic Basin crudes are the barom­e­ter for the health of the global oil mar­ket since the re­gion is the first to re­flect looser fun­da­men­tals. Strug­gling North Sea phys­i­cal crudes like Brent, For­ties, and Ekofisk sug­gest that bar­rels are hav­ing dif­fi­culty find­ing buy­ers,” he added. This fol­lows the run-up in US pro­duc­tion to daily out­put of 10.04 mil­lion bpd as of Novem­ber, high­est since 1970, push­ing it into sec­ond place among crude pro­duc­ers, ahead of Saudi Ara­bia and trail­ing only Rus­sia, ac­cord­ing to the US Depart­ment of En­ergy.

On Tues­day, the Paris-based In­ter­na­tional En­ergy Agency said in­creased US sup­ply could cause out­put to ex­ceed de­mand glob­ally in 2018. For­ties crude dif­fer­en­tials to dated Brent have fallen to mi­nus 70 cents, down from a pre­mium of 75 cents at the start of the year as the For­ties pipe­line re­turned to nor­mal op­er­a­tion.

The For­ties dif­fer­en­tials are now not far off their low­est since the mid­dle of 2017, when the bench­mark Brent crude price was trad­ing at around $45 per bar­rel com­pared to $62 per bar­rel now and $71 per bar­rel just a few weeks ago. In the United States, key grades traded in Texas and Louisiana have fallen to their low­est in sev­eral months.

Urals, diesel strug­gle

A sim­i­lar pat­tern is ob­served in the Rus­sian Urals mar­ket, one of the big­gest by vol­umes in Europe. At a dis­count of $2.15 to dated Brent, Urals’ dif­fer­en­tials in the Mediter­ranean are now at their low­est since Sept 2016, when Brent fu­tures were hov­er­ing near $40-$45 per bar­rel. “Sour grades are not in a good shape world­wide, so is Urals,” said a Euro­pean crude oil trader, who asked not to be named be­cause he is not al­lowed to speak pub­licly. That sharply con­trasts with a sit­u­a­tion from the start of 2017 when OPEC cuts of pre­dom­i­nantly sour grades made them at­trac­tive to buy­ers.

“Sup­ply is more than am­ple in Europe, Urals faces strong com­pe­ti­tion from the Mid­dle Eastern grades,” said an­other trader on the Rus­sian crude oil mar­ket adding that sup­plies of Urals to Asia were un­eco­nomic due to a wide Brent-Dubai spread. Adding pres­sure on Urals, traders ex­pect load­ings of the grade to rise in the com­ing months due to sea­sonal main­te­nance at Rus­sian re­finer­ies.

A de­cline in phys­i­cal crude val­ues gen­er­ally means better mar­gins for re­fin­ers. But it is also not hap­pen­ing this time.

The profit mar­gin re­fin­ers make on pro­cess­ing crude into diesel col­lapsed in Europe and the United States by over 18 per­cent over the past week, ac­cord­ing to Reuters data.

Europe, where nearly half of the ve­hi­cles are fu­elled by diesel, is the home to the global bench­mark for diesel prices and the big­gest stor­age hub for the road fuel as re­gional re­finer­ies are un­able to meet lo­cal de­mand. “Oil de­mand isn’t that bad in gen­eral, but heat­ing oil de­mand has been hor­ri­ble, par­tic­u­larly in the United States and Ger­many,” Robert Camp­bell, head of global oil prod­uct mar­kets at con­sul­tancy En­ergy As­pects, said. “Euro­pean re­finer­ies are run­ning at very high rates since De­cem­ber so there is plenty of sup­ply in the re­gion while the weather has been warmer than usual, which led to weaker de­mand.”

The re­fined prod­uct mar­kets were ex­pected to sig­nif­i­cantly tighten in March and April due to a high sea­sonal re­fin­ery main­te­nance sched­ule. But in a fur­ther in­di­ca­tion of wa­ver­ing con­fi­dence, the spread be­tween the April Low Sul­phur Ga­soil fu­tures to the May con­tract also crashed in re­cent weeks from an all-time high pre­mium of $5 on Jan. 26 to a dis­count of 50 cents on Tues­day. —

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