Daily Oil Market Report - 8th October 2018

Fragile refinery margins can ruin the oil price rally: Oil prices rebounded from the lows seen in Asian hours and ended up only 25c weaker on the day. This is quite impressive given the growing number of headlines about oil output increases and India potentially buying 9 million barrels of Iranian crude in November.

China published their august oil demand figures today. Their August oil consumption rose 6% y-o-y. Despite the high oil prices, we haven’t seen a major demand slowdown yet in a major country. Even India which has seen its oil import bill soar, due to its record low exchange rate, has shown healthy demand figures. This week IEA will publish their monthly report and it will be interesting to see if they revise their Q4 or 2018 demand downwards due to the recent oil price rally. IEA have assumed 2018 oil demand growth of 1.4MMBD and they have fluctuated their revisions between 1.3-1.5MMBD through the year. We will do a deep dive in oil demand for the major countries in the next few days as demand destruction is the single biggest reason to be bearish in 2019.

Given it was Columbus Day in the US, we were expecting a quiet day for US products. However, the unexpected fire at Irving refinery in Canada changed that. RBOB cracks rallied on the news that the 300KBD refinery with a large FCC can be out of service for a while. There is still no timeline and half of Irving was already down on planned maintenance. Despite this outage, RBOB came off its high as there are still some structural bearish issues for US gasoline and the PADD 1 region still has very high gasoline stocks that need to be depleted.

To offset this news was the bearish headline that Ruwais FCC in UAE will be back online later on this year after the major fire in January 2017. This will reduce UAE’s gasoline imports and make Middle East a net long gasoline region.

Hurricane Michael got stronger over the weekend and Gulf coast producers are taking safety precaution by shutting down some of the production. So far, roughly 325KBD of crude oil and 284MMCF/D of gas been shut. There are no refineries in the hurricane’s path. So if the hurricane does continue its current trajectory, it will cause some demand destruction in Florida. However, people might fill up their tanks before the hurricane makes landfall.

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In non-oil news, stock markets were down earlier on the day. FTSE ended down over 1% on Italian fears, but S&P clawed back most of its losses to end up flat. The bull rally in natural gas continues on the back of low stocks and now colder weather predicted in the US.

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CHART OF THE DAY

Fragile European Margins: We talked about weak European gasoline cracks in our report last week. The weak gasoline crack is dragging down the European margins to seasonal low levels. There are now rumors of reported run cuts. No refinery will officially announce run cuts which makes the loss in crude demand hard to quantify. The below benchmark assumes 50% gasoline, 30% diesel and 20% fuel oil. Every refinery is different which makes the absolute margins impossible to calculate, but its the downward trend which is worrying for oil bulls.

Diesel cracks remain to be robust but they are not enough to compensate for the weak gasoline cracks. Discounting the outage at Irving today which is still unknown, there is more bearishness for gasoline to come we enter the weak winter demand period.

European refiners have high maintenance in early 2019, if these margins remain at these levels don’t be surprised if some refiners advance their maintenance a few months early.

 Source: CME (Margin based on 50% Gasoline, 30% diesel and 20% Fuel Oil)

Source: CME (Margin based on 50% Gasoline, 30% diesel and 20% Fuel Oil)


 Brent and WTI structure continues to weaken in the prompt months. WTI front month spread briefly touched below 10c. With European refinery margins at weak levels, refiners will try delaying their crude purchases as much as possible.

Brent and WTI structure continues to weaken in the prompt months. WTI front month spread briefly touched below 10c. With European refinery margins at weak levels, refiners will try delaying their crude purchases as much as possible.


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