Following heavy losses last week, crude has found some support as US sanctions on Iran

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1 Weekly Oil Market & Refining Update - Following heavy losses last week, crude has found some support as US sanctions on Iran commence - 5 November 2018 Highlights Following heavy losses last week, crude has found some support as US sanctions on Iran commence Fig 4: Urals Crude Price Differentials Boost for refining margins as crude prices continue to fall Forward product curves and indicative arbitrage economics Quarterly World Oil Supply/Demand & Stock Change Weekly Oil Market & Refining Update - 5 November 2018 Following heavy losses last week, crude has found some support as US sanctions on Iran commence Following the collapse in prices last week after the release of very bearish US supply data and the announcement that some eight countries would receive waivers on US sanctions on Iran, the market has now found some support (see FGE Flash Alert 2nd November 2018). Some general bullish sentiment also returned on Friday, with indications of progress in the US-China trade talks. Dated Brent fell $3.78/bbl w-o-w last week, as global demand worries continued to spook traders earlier in the week. Further bearish sentiment was provided in the second half of the week by the EIA s announcement that US crude production rose to mmb/d in August; 400 kb/d higher than previously thought; US crude production forecasts will need to be rethought following the EIA s monthly data update last week (see FGE - Weekly Fundamentals Update 1st November 2018). Despite that, crude prices have increased today, albeit slightly, at time of writing as sanctions on Iran commence. Fig 1: Weekly Crude Prices 1

2 The market is still looking for clarification on what exactly the Iranian oil import waivers granted on US sanctions means for the overall supply/demand balance. We think that the market over-reacted somewhat on Thursday when ICE Brent (front month) dropped $4/bbl, and some gains from here are possible. With regards to our expectations, what we have heard so far about Iran waivers still sits in line with what we had originally expected, with Iranian oil exports looking likely to fall to about 1 mmb/d for now. Recent fears that global supply was inadequate for global oil demand have well and truly been vanquished. This will take a lot of pressure off OPEC+ spare capacity and alleviate concerns of supply shortfalls. A large shift in the market structure of Oman and Dubai crudes towards the end of the month would typically result in a similar adjustment to Saudi OSPs to Asia. However, despite a considerable reduction in the backwardation of Oman and Dubai at the end of October, Saudi Arabia has only slightly trimmed its Arab Light OSP to Asia for December loading. Expectations of tighter supplies out of the Middle East due to US sanctions on Iran may have influenced this change in tack. Brent/Dubai differentials narrowed this week, with our assessment of EFS down around 30 cents to $1.50/bbl. Both ICE Brent and NYMEX time-spreads remain in contango at the front of the curve, with the time-structure for both crudes getting weaker w-o-w. Supply pressures continue to weigh on the market; clarity is still needed over what exactly US sanctions on Iran will look like in terms of the effect on export volumes now that a number of countries have been granted exemptions, though apparently the US administration is not intending to release details. Fig 2: ICE Brent and NYMEX Time Spreads 2

3 The WTI/Brent diff narrowed last week, largely due to US prices finding more support than Brent at the end of the week. WTI Cushing/MEHhas remained relatively unchanged at around -$6.5/bl. However, MEH prices vs Brent have gained considerable ground. Through October, the MEH diff to Brent averaged -$3.35/bbl, peaking at around -$5/bbl. With the diff at these discounts, there has been a considerable incentive to export US crudes. However, the diff has narrowed in the past few days, currently around only -$1.8/bbl. T he Dated Brent/NWE Uralsdiff averaged -$1.99/bbl last week (closing at -$0.83/bbl on Friday), narrower by $2/bbl w-o-w. Urals exports via Russia s Baltic ports continue to remain below last year s levels due to high domestic crude runs, but this is not a new development; it has been the case for 18 straight months now. Instead, the $5/bbl drop in Dated Brent prices this past week and the return of European refiners from seasonal maintenance are the primary factors behind firmer Urals crude differentials. As a result, we assess that the arb to ship Urals from the Baltic to the Med, as well as to Asia, closed towards the end of last week. The Med Urals/Dated Brent crude diff averaged -$0.75/bbl last week, narrower by $0.21/bbl w-o-w, possibly helped by the closure of the Black Sea port of Novorossiysk due to bad weather. Russia s October crude & condensate production hit a new post-soviet record in October, confirmed at mmb/d by the country s Ministry of Energy last week. This is ~500 kb/d higher y-o-y and ~50 kb/d higher m-o-m. Prime Minister Medvedev reportedly said today that everything is fine with the current price level. Fig 3: US Crude Differentials 3

4 Fig 4: Urals Crude Price Differentials Boost for refining margins as crude prices continue to fall Refining margins, particularly European margins, had some respite from the recent bear run last week and posted strong increases on the back of lower crude costs and good middle distillate/fuel oil demand. Complex USGC margins were essentially flat from the previous week, as refiners started to return from autumn maintenance; Lyondell s 120 kb/d CDU at Houston was due to be starting up last week. Total US refinery runs were up by 150 kb/d to 16.4 mmb/d from the previous week; a far cry from record highs of 18.0 mmb/d over the summer. Singapore margins were a mixed bag, with hydroskimming margins increasing, boosted by positive fuel oil cracks, but FCC margins decreasing as a result of surplus gasoline on the market. Despite an improvement in refining margins, we believe the gains made this week will provide only temporary relief to refiners, as product prices will eventually catch up with crude prices and mimic their downward trend. Once Midwestern or Gulf Coast refiners in the US return from maintenance, we are likely to see further downwards pressure on refining margins. Fig 5: Regional Refinery Margins 4

5 The glut of light distillate material and weak petchem demand is still causing naphtha cracks to fall, although there was a slight recovery in the NWE crack last week. Cracks are at their lowest levels since December 2014, with additional spot sales from ADNOC s Ruwais refinery putting further downwards pressure on naphtha. Singapore cracks fell by over $1/bbl despite net imports decreasing by 60 kt (~530 kb) over the week. Even with Asian naphtha prices falling, the arb from the West is still wide open. The USGC-Japan arb currently stands at $6.3/bbl; a level not seen since January We are forecasting naphtha cracks to improve as petchem demand picks up; however, with cracker operators rumoured to be considering run cuts, it may take a few months for the current supply glut to clear. Gasoline followed a similar pattern with cracks falling everywhere last week, except in NWE. Light distillate stocks drew in ARA last week by 0.5 mmb, which helped boost NWE cracks (see FGE Global Product Inventories 1st November 2018). That factor, plus ample supply in the Atlantic Basin, has kept the arb from Europe to the US firmly closed. The EIA s weekly data provided brief optimism on improving demand, reporting a higher-thanexpected 3.2 mmb stockdraw (vs. 2.1 mmb market expectation), but the LLS gasoline crack still fell by $0.41/bbl over the week. In contrast in Asia, the Singapore-Dubai gasoline crack fell to its lowest level since December Operational problems at S-Oil s 76 kb/d RFCC failed to support the crack, which saw its sixth consecutive weekly decline. Moving forwards, we are forecasting cracks to languish in their current $3-8/bbl range until the summer driving season starts next year. Fig 6: Regional Product Cracks 5

6 Middle distillate cracks were well-supported last week, as various supply issues around the world continued to take effect. Low Rhine river water levels are still disrupting shipping along the river, forcing some countries to release strategic stocks. As a result, NWE Brent diesel cracks rose to above $20/bbl for the first time since November In India, a number of hydrocrackers and distillate hydrotreaters are offline for planned/unplanned maintenance, limiting exports into SE Asia. Globally, middle distillate stocks fell by 4.4 mmb, now lower y-o-y by 1.5 mmb. We believe cracks will be well-supported over the coming weeks, as Indian refiners undergo heavy turnaround maintenance, briefly turning India into a net importer, while seasonal heating oil demand increases. Fuel oil cracks jumped last week as supply tightness continues. Following the Singapore crack turning positive recently, the Urals HSFO crack in the Mediterranean is also on the verge of doing so. The start-up of ExxonMobil s 50 kb/d coker at Antwerp is boosting European cracks. Despite this, the E/W ARB is open as fuel oil stocks continue to be drawn down in Singapore. Last week there was a large 2.9 mmb stockdraw in Singapore, primarily caused by a w-o-w fall in imports of 3.3 mmb. More fuel oil is expected to be removed from the market now that US sanctions on Iran (banning the purchase of oil and oil products) are active. This, together with the start-up of other upgrading units (such as Ruwais 127 kb/d RFCC), will keep the market well-supported until IMO2020-related fears start to emerge in 2H19. 6

7 Forward product curves and indicative arbitrage economics Weekly Oil Market & Refining Update - 5 November 2018 N.B. Arbitrage calculations are indicative and include freight and financing. Demurrage and any other additional costs are not included. 7

8 Quarterly World Oil Supply/Demand & Stock Change Weekly Oil Market & Refining Update - 5 November

9 2018 FGE 9

10 2018 FGE For queries, please to The dissemination, distribution, or copying by any means whatsoever without FGE s prior written consent is strictly prohibited. 10