Distillate fuel oil market set to tighten in 2018

People pass a gas station of Venezuelan state-owned oil company PDVSA in Caracas, Venezuela, in this November 16, 2017 photo. (REUTERS)
Updated 19 November 2017
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Distillate fuel oil market set to tighten in 2018

LONDON: US refineries are struggling to meet booming demand for distillate fuel oil at home and in export markets which will leave the distillate market very tight in 2018.
Even if the northern hemisphere winter is only averagely cold, the distillate market looks set to enter 2018 with lower-than-average stocks and fast-growing demand, which should keep prices and refining margins firm.
The gross refining margin for turning Brent into US heating oil has climbed to almost $19 per barrel from a recent low of less than $11 in May, despite record US refinery production of distillate.
Refiners therefore have a strong commercial incentive to maximize distillate output, which should ensure crude intake remains high, and spread tightness into the crude market. US refiners processed a seasonal record 16.6 million barrels per day (bpd) of crude last week, which was 600,000 bpd higher than at the same point in 2016 and 1.8 million bpd above the 10-year average.
And they produced a seasonal record 5.2 million bpd of distillate fuel oil, which was 300,000 bpd above 2016 and 600,000 bpd above the decade average.
But it was not enough to prevent distillate stocks falling by another 800,000 barrels to less than 125 million barrels, according to the US Energy Information Administration.
Distillate stocks have shrunk by 38 million barrels since the start of the year compared with a seasonal decline of less than 10 million in 2016 and a 10-year average of just 5 million.
Stocks are now 24 million barrels below the prior-year level, and 9 million barrels below the decade average, at levels that have not been seen since 2012-2014.
The distillate market was heavily oversupplied at the start of 2017 but has become progressively undersupplied in the course of the year.
Domestic consumption has been running well above prior-year levels and the long-term average in most weeks since March.
But it is the phenomenal strength of exports that is causing stocks to continue drawing down even as refineries maximize output.
Exports over the last four weeks were running at a record 1.5 million bpd, an increase of more than 400,000 bpd or almost 40 percent compared with the same period in 2016.
Distillate stocks look severely depleted even before the main winter heating season begins in North America and Western Europe.
The last two winters have been relatively mild in the US but if this one reverts to the mean stocks could start to feel tight.
While some distillate fuel oil is still used for heating, most is used in the high-powered engines used to move freight and industrial machinery so demand is closely linked to the business cycle and trade. With nearly all regions of the global economy experiencing a synchronized economic expansion and world trade volumes growing at the fastest rate for six years, distillate demand is growing rapidly.
The global economic expansion and trade upturn are expected to continue boosting demand even further in 2018/19 unless there is a major macroeconomic, financial or trade shock.
Rising prices for a whole range of primary commodities, including oil, will also spur faster economic growth in commodity-dependent developing countries, giving an extra impetus to distillate demand.
Commodity exporters accounted for some of the strongest growth in oil consumption, primarily diesel, before oil prices slumped in 2014, and could drive strong distillate demand growth again in 2018/19.
• John Kemp is a Reuters market analyst. The views expressed are his own


Oil-rich South Sudan seeks investment in fragile new peace

Updated 22 November 2018
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Oil-rich South Sudan seeks investment in fragile new peace

  • The country is eager to make up for $4 billion in lost revenue caused by the five-year conflict
  • The government is offering prospective investors incentives such as a tax-free grace period of up to 10 years

JUBA, South Sudan: South Sudan is making its first big foreign investment pitch since declaring an end to civil war, but the oil-rich nation faces hesitation from some companies that want to make sure the fragile new peace deal holds.
The country is eager to make up for $4 billion in lost revenue caused by the five-year conflict after the government and armed opposition signed a power-sharing agreement two months ago.
Tapping 3.5 billion barrels of oil reserves, the third largest in Africa, is the fastest route for South Sudan, whose economy is almost entirely dependent on oil exports.
“Do business or get out,” South Sudan’s petroleum minister, Ezekiel Lol Gatkuoth, said in an interview with The Associated Press on Wednesday.
More than 400 international and local companies are attending this week’s Africa Oil & Power Conference in the capital, Juba, up from the 300 that attended the initial conference last year.
The government is offering prospective investors incentives such as a tax-free grace period of up to 10 years. It hopes to build on the momentum created in August when drilling resumed in key oil fields for the first time since 2013. The aim is to return to the pre-conflict production of 350,000 barrels per day.
Some at the investment conference expressed cautious optimism after preliminary signs of growth.
Earlier this year Russian oil company Zarubezhneft signed a memorandum of understanding with South Sudan’s oil ministry to explore the 10 oil blocks that remain open. The government is also speaking with Russia’s third largest oil producer, Gazprom Neft, and Rosneft.
Those already licensed to operate in the newly reopened oil fields in Unity State are China National Petroleum Corporation, India-based Oil and Natural Gas Corporation and Malaysia-based Petronas.
And early next year local oil marketing company Trinity Energy will begin building East Africa’s only oil refinery, a $350 million project that will take about 18 months to complete. It will be able to produce 25,000 barrels per day. Currently South Sudan exports its crude oil, only to buy it back.
“South Sudan is a fantastic blank canvas ... because we see that the demand is here,” said Pearl Uzokwe, director of governance and sustainability at the Sahara Group, a Nigerian energy and infrastructure company that recently signed a memorandum of understanding with the government.
However, she said, it’s important for South Sudan’s government to create an enabling environment.
Past peace deals, as well as power-sharing arrangements between President Salva Kiir and armed opposition leader Riek Machar, have collapsed amid fresh fighting.
One analyst said most of his clients, especially Western ones, are taking a “wait and see” approach even as the mood seems positive.
“They’re not willing to commit to anything right now,” Shawn Robert Duthie, senior analyst for Africa Risk Consulting, told the AP. Many are worried about their reputational risk, he said. South Sudan’s oil sector has faced scrutiny for allegedly using oil revenues to fuel the civil war.
If the new peace deal can last a year without any huge flare-ups and if Kiir and his returning deputy Machar can work together it might help in bringing more people to the table, Duthie said.