Crude rally stalls as fuel prices soften
Crude rally stalls as fuel prices soften
Gross refining margins for producing distillate fuel oil from US crude rose from $14 per barrel in June to more than $25 per barrel in the middle of November.
The US distillate market started the year in substantial oversupply, with inventories well above the long-term average.
But as a result of strong demand, primarily in export markets, the market has moved into an increasingly large deficit as the year has progressed.
Distillate stocks have moved from a surplus of 33 million barrels over the 10-year average in February to 7 million barrels below the average at the start of December.
Stocks have fallen by more than 33 million barrels since the start of the year compared with a 10-year seasonal average fall of 3 million barrels.
As stocks have shrunk, distillate prices and margins have risen to encourage refiners to produce more of the fuel, with a clear uptrend since the end of June.
US refiners have responded by increasing crude processing and distillate production to unprecedented levels to meet demand.
US refinery crude runs have been running at record rates almost continuously since April, according to data from the US Energy Information Administration.
Runs in the most recent week were 800,000 barrels per day (bpd) higher than at the same point in 2016 and 1.8 million bpd above the 10-year seasonal average.
At the end of November, US refineries were processing crude at rates that had only ever previously been seen during the summer peak driving season.
There has been a clear tilt toward maximizing the production of distillate fuel oil to take advantage of higher margins than on gasoline.
US refineries produced a record 5.4 million bpd of distillates in the last week of November, which was 280,000 bpd higher than the year before and almost 480,000 bpd above the 10-year seasonal average.
Most of this extra distillate is being exported to Latin America and other overseas markets with only a modest increase in domestic consumption.
Strong worldwide distillate consumption reflects the synchronized economic expansion across most advanced and emerging economies and the acceleration in global trade and freight.
Distillate is set to remain the main driver of oil demand in 2018, unless there is a recession in the United States or China.
But with refineries focused on maximizing throughput to make distillate, gasoline, which is a co-product, will remain relatively more abundant.
Gasoline stocks, like distillates, have drawn down this year, but the reduction has been far smaller and stocks remain above the decade average.
In the most recent week, US gasoline stocks rose sharply by almost 6.8 million barrels, much faster than the seasonal average.
In the last four weeks, distillate stocks have also stopped tightening compared with the seasonal trend, as record refinery runs and distillate production have finally caught up with demand.
Distillate and gasoline prices and margins have been under pressure since the middle of November, amid signs that fuel markets are no longer in deficit, which has effectively capped crude oil prices.
Signs that the distillate and gasoline markets are no longer under-supplied point to less frenetic refinery runs in future and a moderation in crude demand.
In the near term, downward pressure on product and crude prices has intensified because of the record or near-record bullish positions held by hedge funds in distillates, gasoline and crude.
Portfolio managers have become very sensitive to any indication that inventory draws may be ending and that prices and margins have peaked and might be about to fall.
In the longer term, with developed and emerging markets on track for expansion next year, strong demand for distillate fuel oil should keep margins firm and impart an upward bias to crude prices in 2018.
• John Kemp is a Reuters market analyst. The views expressed are his own.
Apple Watch, FitBit could feel cost of US tariffs
SAN FRANCISCO: The latest round of US tariffs on $200 billion of Chinese goods could hit the Apple Watch, health trackers, streaming music speakers and other accessories assembled in China, government rulings on tariffs show.
The rulings name Apple Inc’s watch, several Fitbit Inc. activity trackers and connected speakers from Sonos Inc. While consumer technology’s biggest sellers such as mobile phones and laptops so far have faced little danger of import duties, the rulings show that gadget makers are unlikely to be spared altogether and may have to consider price hikes on products that millions of consumers use every day.
The devices have all been determined by US Customs and Border Patrol officials to fall under an obscure subheading of data transmission machines in the sprawling list of US tariff codes. And that particular subheading is included in the more than 6,000 such codes in President Donald Trump’s most recent round of proposed tariffs released earlier this month.
That $200 billion list of tariffs is in a public comment period. But if the list goes into effect this fall, the products from Apple, Fitbit and Sonos could face a 10 percent tariff.
The specific products listed in customs rulings are the original Apple Watch; Fitbit’s Charge, Charge HR and Surge models; and Sonos’s Play:3, Play:5 and SUB speakers.
All three companies declined to comment on the proposed tariff list. But in its filing earlier this month to become a publicly traded company, Sonos said that “the imposition of tariffs and other trade barriers, as well as retaliatory trade measures, could require us to raise the prices of our products and harm our sales.”
The New York Times has reported that Trump told Apple CEO Tim Cook during a meeting in May that the US government would not levy tariffs on iPhones assembled in China, citing a person familiar with the meeting.
“The way the president has been using his trade authority, you have direct examples of him using his authority to target specific products and companies,” said Sage Chandler, vice president for international trade policy at the Consumer Technology Association.
The toll from tariffs on the gadget world’s smaller product lines could be significant. Sonos and Fitbit do not break out individual product sales, but collectively they had $2.6 billion in revenue last year. Bernstein analyst Toni Sacconaghi estimates that the Apple Watch alone will bring in $9.9 billion in sales this year, though that estimate includes sales outside the United States that the tariff would not touch.
It is possible that the products from Apple, Fitbit and Sonos no longer fall under tariff codes in the $200 billion list, trade experts said. The codes applied to specific products are only public knowledge because their makers asked regulators to rule on their proper classification. And some of the products have been replaced by newer models that could be classified differently.
But if companies have products whose tariff codes are on the list, they have three options, experts said: Advocate to get the code dropped from the list during the public comment period, apply for an exclusion once tariffs go into effect, or try to have their products classified under a different code not on the list.
The last option could prove difficult due to the thousands of codes covered, said one former US trade official.