Distillate fuel oil market set to tighten in 2018
Distillate fuel oil market set to tighten 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 prices inch up as US crude stocks drop, Iran sanctions weigh
- US crude inventories fell by 5.2 million barrels in the week to August 17 to 405.6 million barrels
- ‘The Iran issue continues to occupy traders’ minds’
SEOUL: Oil markets rose on Wednesday on a drop in US crude inventories and a weaker dollar, while concerns about a potential shortfall in Iranian supply from November due to US sanctions also buoyed prices.
Brent crude oil futures were at $72.90 per barrel at 0653 GMT, up 27 cents, or 0.37 percent, from their last close.
US West Texas Intermediate (WTI) crude futures were up 27 cents, or 0.41 percent, at $66.11 per barrel.
US crude inventories fell by 5.2 million barrels in the week to Aug. 17 to 405.6 million barrels, ahead of analyst forecasts for a fall of 1.5 million barrels, according to data from industry group the American Petroleum Institute.
Official data from the US Energy Information Administration (EIA) is due at 10:30 a.m. EDT (1430 GMT) on Wednesday.
“Investors are also confident that (official) inventories in the United States will decrease this week,” ANZ Bank said in a note.
Signs of slowing US crude output growth and a weaker US dollar also provided some support to oil prices, said Kim Kwang-rae, commodity analyst at Samsung Futures in Seoul.
The US dollar index against a basket of six major currencies eased on Wednesday to 95.211 after losing 0.7 percent the previous day, weighed down by US President Trump’s comments on monetary policy.
A weaker US dollar makes oil, which is priced in dollars, less expensive for buyers in other currencies.
The EIA cut its 2018 US crude production growth forecast on Aug. 7 to 10.68 million barrels per day (bpd) from 10.79 million bpd amid lower crude prices.
Concerns also remain over how much oil will be removed from global markets by renewed sanctions on Iran, despite worries that demand-growth could weaken amid a trade dispute between the United States and China, the world’s two biggest economies.
“The Iran issue continues to occupy traders’ minds,” said Greg McKenna, chief market strategist at futures brokerage AxiTrader.
Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC) and OPEC’s third-largest oil producer, said earlier this week no other OPEC member should be allowed to take over its share of oil exports.
Meanwhile, a Chinese trade delegation is in Washington to discuss the trade dispute with the US side. But signs of a thaw were unlikely as US President Donald Trump told Reuters in an interview on Monday that he did not expect much progress.