Oil Market Report - 29th January 2019

All Eyes on Refinery Margins: Oil prices started to stabilize in January as the dust began to settle after the sharp decline in prices in Q4. The 5 Day moving average and the 50 day moving average is now only $2 apart. Since the last report, we have had Saudi report deeper output cuts in 2019 and US imposing tougher sanctions on Venezuela. Despite this, prices have remained in a very narrow range.

One of the main reasons behind this under performance in oil prices is the poor refining margins. Refinery margins are weak globally and economic run cuts soon should not be a surprise. In Europe, light end cracks continue to make new lows. Prompt Naphtha cracks are near $-9 and gasoline cracks are at -$3. Strong diesel and fuel oil cracks are offsetting this weakness to some extent, however any refinery with higher light ends output should feel the pain. Each individual refinery has different economics, but Neste reports its refinery margin daily and the current margins are now at the lowest level since March 2014.

Neste’s European Refinery Margin (Source: Neste)

Neste’s European Refinery Margin (Source: Neste)

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Light End Cracks

Light End Cracks

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Moving away from Europe, Asian refiners is also feeling the pinch due to the narrow Brent-Dubai. Sour crude is the flavor of the month, and the Asian benchmark should get expensive for Asian refiners.

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US FCC Runs (Source: EIA)

US FCC Runs (Source: EIA)

US refinery margins are also under pressure given they have the highest gasoline yield globally. Only refiners with advantaged crude (predominantly PADD 2 and PADD 3) are able to sustain the consistently low light end cracks. In the US, FCC runs have ranged from 4.8-5.2MMBD which is above the 2017 average. We should start seeing lower FCC numbers in the months to come as the effect of weak gasoline prices start to have an impact.

Moving on to Venezuela, there is a big risk that Venezuelan flows can stop flowing to the US due to increasing sanctions. As of w/e 25th January, the 4 week average of Venezuela imports into the US was 583KBD. In theory this volume can be easily replaced by similar heavy barrels from Canada and Iraq. The 4 week average of Canadian imports into the US reached a record high of 3662KBD due to last week’s record print of 4063KBD. This was the first time that Canada sent over 4MMBD to the US, we need to monitor this week’s stats to see if that number was a one-off. In addition, India and China have been neutral on the Venezuelan development so they can take any displaced barrels due to US sanctions.

EIA Weekly Venezuelan Imports into the US

EIA Weekly Venezuelan Imports into the US

EIA Weekly Canadian Imports into the US

EIA Weekly Canadian Imports into the US

There was some market chatter about a possible SPR release. This should help keep a lid on any flat price spikes due to Venezuela. The latest data from DOE shows that the US SPR has 254.6 Million Sweet barrels and 394.5 Million Sour Barrels. US government has sold around 15 million barrels in the last year, however assuming net imports at 6MMBD (8 imports MINUS 2 Exports), the stock cover is still at a huge 108 days.

EIA US SPR Crude Stocks

EIA US SPR Crude Stocks

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