Oil drops as Iran signals support for OPEC production rise

Commercial US crude inventories dropped by 5.9 million barrels in the week to June 15, to 426.53 million barrels, the Energy Information Administration said. (Reuters)
Updated 21 June 2018
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Oil drops as Iran signals support for OPEC production rise

  • Prices were prevented from dropping further by robust US fuel demand seen in record refinery runs, strong travel data and a large decline in crude inventories
  • Beyond the short-term, Barclays said there were headwinds for oil prices

SINGAPORE: Oil prices fell on Thursday as Iran signaled it could be won over to a small rise in OPEC crude output, potentially paving the way for the producer cartel to agree a supply increase during a meeting on Friday.
However, prices were prevented from dropping further by robust US fuel demand seen in record refinery runs, strong travel data and a large decline in crude inventories.
Brent crude futures were at $74.33 per barrel at 0426 GMT, down 41 cents, or 0.55 percent, from their last close.
US West Texas Intermediate (WTI) crude futures were at $65.50 a barrel, down 21 cents, or 0.3 percent.
Iran, a major supplier within the producer cartel of the Organization of the Petroleum Exporting Countries (OPEC), signaled on Wednesday it could agree on a small increase in the group’s output during a meeting to be held at OPEC’s headquarters in Vienna on June 22 together with non-OPEC member but top producer Russia.
“There appears to be an air of confidence that this deal will move through,” said Stephen Innes, head of trading for Asia-Pacific at futures brokerage OANDA in Singapore.
“We expect OPEC and Russia to gradually add supplies back to the market by next year, mostly offsetting the almost 1 million barrels per day (bpd) supply disruption in Venezuela,” Barclays bank said.
Tehran had previously resisted pressure by OPEC’s de-facto leader Saudi Arabia to raise output.
Even with Iran appearing to fall in line, analysts do not expect a harmonious OPEC meeting.
“Our expectations are for a tense, discordant and highly geopolitical OPEC+ meeting,” said Japan’s Mitsubishi UFJ Financial Group in a note to clients.
OPEC, together with other key producers including Russia, started withholding output in 2017 to prop up prices, but a tightening market in 2018 led to calls by major consumers for more supplies.
In a sign of strong demand, US refineries processed a seasonal record of 17.7 million bpd of crude oil last week, according to data from the Energy Information Administration (EIA) said on Wednesday.
This comes as a record 46.9 million Americans are expected to travel during the upcoming July 4 holiday, according to the American Automobile Association on Thursday, which is seen as a leading indicator for US fuel demand.
Amid healthy consumption, commercial US crude inventories dropped by 5.9 million barrels in the week to June 15, to 426.53 million barrels, the EIA said.
US crude oil production was flat week-on-week, remaining at a record 10.9 million bpd.
Beyond the short-term, Barclays said there were headwinds for oil prices.
“Deleveraging in China and a weakening in the narrative around synchronous global economic growth are likely to add headwinds for all commodities,” it said.


Asia’s refining profits slump as Mideast exports surge

Updated 23 February 2019
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Asia’s refining profits slump as Mideast exports surge

  • Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India
  • However, overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs

SINGAPORE: Asia’s biggest oil consumers are flooding the region with fuel as refining output is exceeding consumption amid a slowdown in demand growth, pressuring industry profits.
Since 2006, the Asia-Pacific has been the world’s biggest oil-consuming region, led by industrial users South Korea and Japan along with rising powerhouses China and India.
Yet overbuilding of refineries and sluggish demand growth have caused a jump in fuel exports from these demand hubs.
Compounding the supply overhang, fuel exports from the Middle East, which BP data shows added more than 1 million barrels per day (bpd) of refining capacity from 2013 to 2017, have doubled since 2014 to around 55 million tons, according to Refinitiv.
Car sales in China, the world’s second-biggest oil user, fell for the first time on record last year, and early 2019 sales also remain weak, suggesting a slowdown in gasoline demand.
For diesel, China National Petroleum Corp. in January said that it expected demand to fall by 1.1 percent in 2019. That would be China’s first annual demand decline for a major fuel since its industrial ascent started in 1990.
The surge in fuel exports combined with a 25 percent jump in crude oil prices so far this year has collapsed Singapore refinery margins, the Asian benchmark, from more than $11 per barrel in mid-2017 to just over $2.
Combine the slumping margins with labor costs and taxes and many Asian refineries now struggle to make money.
The squeezed margins have pummelled the stocks of most major Asian petroleum companies, such as Japan’s refiners JXTG Holdings Inc. or Idemitsu Kosan, South Korea’s top oil processor SK Innovation, Asia’s top oil refiner China Petroleum & Chemical Corp. and Indian Oil Corp., with some companies dropping by about 40 percent over the past year. Jeff Brown, president of energy consultancy FGE, said the surge in exports and resulting oversupply were a “big problem” for the industry.
“The pressure on refinery margins is a case of death by a thousand cuts ... Refinery upgrades throughout the region are bumping up against softening demand growth,” he said.
The profit slump follows a surge in fuel exports from China, India, Japan, South Korea and Taiwan. Refinitiv shipping data shows fuel exports from those countries have risen threefold since 2014, to a record of around 15 million tons in January.
The biggest jump in exports has come from China, where refiners are selling off record amounts of excess fuel into Asia.
“There is a risk for Asian market turmoil if (China’s fuel) export capacity remains at the current level or grows further,” said Noriaki Sakai, chief executive officer at Idemitsu Kosan during a news conference last week.
But Japanese and South Korean fuel exports have also risen as demand at home falls amid mature industry and a shrinking population. Japan’s 2019 oil demand will drop by 0.1 percent from 2018, while South Korea’s will remain flat, according to forecasts from Energy Aspects.
In Japan, oil imports have been falling steadily for years, yet its refiners produce more fuel than its industry can absorb. The situation is similar in South Korea, the world’s fifth-biggest refiner by capacity, according to data from BP.
Cho Sang-bum, an official at the Korea Petroleum Association, which represents South Korean refiners, said the surging exports had “triggered a gasoline glut.”
That glut caused negative gasoline margins in January.