Oil Market Report - 12th February 2019
An Indecisive Crude Market: Brent continues to remain in a narrow range of $60-$63 for the past 3 weeks now. Even with sanctions on Iran and Venezuela, its amazing how calm the market is. This market is eerily quiet and unlikely to last long.
Spec length has increased in Brent for the past 5 weeks, however levels are still way below last year’s levels. The prompt Brent spreads are ticking up with front month spreads switching in and out of backwardation. The increasing loss of Venezuelan crude to the US and European market is tightening up the sour grades globally. Prompt Brent-Dubai reached negative levels for the first time in 3 and a half years. While the light end weakness continues as we get weak gasoline demand prints from the US. However, the peak pessimism on gasoline should now stop as US stocks should start to draw as we enter peak refinery maintenance.
The fuel oil crack continues to rally. This rally has caught many market participants by surprise as it continues to keep simple margins elevated. Despite expensive sour crude around the world, increasing fuel oil yield coming out of sour crudes is helping the simple refining margin. While the light end weakness is putting pressure on secondary unit and complex margins. Since we wrote about margin weakness two weeks ago, refinery margins have bounced off their lows. They are still weak but they are not weak enough for refinery run cuts. 2019 should be a challenging year for refiners. According to IEA, refining capacity will increase by 2.6MMBD this year, the largest annual increase in their records, when we are witnessing record low gasoline cracks and possibly a weak 2019 global oil demand.
Some of the EIA monthly data got updated after delays due to the US government shutdown. We have been keeping a close eye on the US FCC feed input by US refineries. Due to the weak gasoline market, in theory some FCC should be cutting runs as the least competitive FCC should have negative margins. However, the November data shows that FCC’s are running fairly normally as they are within the 5 year range. There might be lag on FCC cutting runs, but as FCC feed is near 5MMBD, a 10% cut can easily solve the gasoline overhang. However, given US is exporting almost 1MMBD of gasoline to Latin America some refiners might keep their FCC’s running in order to gain market share in new Latin American markets.
WTI/Brent and WTI spreads weakened this week as issues persisted with the Keystone pipeline which is still not up and running. In addition, with expectation of upcoming drop in refinery runs due to maintenance we can see some big crude stockbuilds coming up. That should continue to put pressure on WTI. The P66 Wood River refinery explosion over the weekend doesn’t support WTI either. This refinery has imported only Canadian crude since 2010 and is one of the most profitable refineries for P66.
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