Crude rally stalls as fuel prices soften

Updated 08 December 2017
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Crude rally stalls as fuel prices soften

LONDON: Surging prices for refined products, especially distillate fuel oil, led crude prices higher between June and November, but now fuels are slipping and putting crude under pressure.
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.


Japan’s last imports of Iranian oil could be in October

Updated 19 July 2018
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Japan’s last imports of Iranian oil could be in October

  • US President Donald Trump’s administration has demanded nations cut all their imports of Iranian oil from November
  • Japan’s largest banks had already said they would stop handling all Iran-related transactions to meet the November deadline

TOKYO: Japanese oil refiners will likely stop loading Iranian crude by mid-September with final shipments arriving in the first half of October, the head of the nation’s oil refiners association said on Thursday, as the US pressures countries to halt such imports.
US President Donald Trump’s administration has demanded nations cut all their imports of Iranian oil from November as it reimposes sanctions over Tehran’s nuclear program.
Although it has said that some allies who are particularly reliant on Iranian supplies may be granted waivers that would give them more time to wind down shipments.
“Japanese oil refiners have been making preparations for lifting plans on the assumption that US sanctions are to be applied,” the president of the Petroleum Association of Japan (PAJ), Takashi Tsukioka, said.
“Considering that payment is to be finished by end of October, it is important that the refiners would finish loading (Iranian oil) before mid-September.”
Tsukioka added that the industry is asking the Japanese government to push to maintain current levels of Iranian imports in talks with the United States. But a Japanese government source, who declined to be identified, said winning a waiver was seen as “difficult.”
PAJ had said last month that Japanese refiners would likely stop importing from Iran, but on Thursday gave more details on potential timings.
Many refiners in Japan, the world’s fourth-biggest oil importer, say they are resigned to completely halting imports from one of their historically important suppliers, unlike during a previous round of sanctions when they substantially reduced imports from the Middle Eastern country.
Three industry sources familiar with the matter said shipping companies had told refiners in Japan that they would stop carrying oil cargoes from Iran. The sources declined to be identified as they were not authorized to speak with media.
That would follow similar announcements by the world’s biggest shipping companies including A.P. Moller-Maersk of Denmark.
Unlike Japan, China and some countries in Europe have significantly raised purchases following the lifting of previous sanctions.
“It would be unreasonable for (Japanese refining) industry to be influenced similarly by such countries,” said Tsukioka, who also serves as chairman of Japan’s second-biggest refiner, Idemitsu Kosan.
Japan’s largest banks had already said they would stop handling all Iran-related transactions to meet the November deadline set by Trump, Reuters reported last week.
Japanese refiners are looking to secure alternative supplies from the Middle East and the US among others, industry sources have said.
Japan last year imported 172,216 barrels per day of Iranian crude, down 24.2 percent from a year earlier, with Iranian oil accounting for 5.3 percent of the nation’s total imports.