US refiners count cost of lower crude prices
Since early December, oil prices have been moving in a narrow band with Brent crude hovering between $60 and $62 per barrel. Lower price forecasts continue from financial advisers and international organizations.
In its Short-Term Energy Outlook, the US Energy Information Administration (EIA) lowered its price forecasts for WTI to $54.19 on average in 2019, down $10.66 from its last projection. It also predicts Brent will average $61 in 2019, down $10.92 from last month’s forecast.
However, the EIA’s downward adjustment is based mainly on record global output, particularly in the US — and lower-than-expected demand isn’t well justified. The EIA forecasts US oil production to average 10.88 million barrels per day (bpd) in 2018, up from 9.35 million bpd in 2017, and then climb to 12.06 million bpd in 2019.
Last Monday, Libya’s National Oil Company (NOC) declared “force majeure” on oil exports from El Sharara oilfield. Production was halted after tribesmen and state security guards seized El Sharara and El Feel oilfields. About 400,000 barrels of crude per day have been lost as a result and production at the Zawiya refinery may be suspended. This news has yet to be reflected in global oil prices.
The lack of full government control over the oil supply in Libya justifies the exemption from output cuts agreed for the country during OPEC’s 175th ordinary meeting. Iran and Venezuela received similar exemptions. Many market participants were incorrect in concluding that the exemption could give Libya latitude to increase production beyond OPEC’s oil output ceiling. Apparently, the latest frequent stoppages in Libyan oil fields should not be considered short-lived anymore, since other disruptions at ports will tend to contribute further to longer outages.
Other bullish news that failed to lift prices was the declaration by the government of Alberta, Canada, of mandatory output curbs on local crude oil production and bitumen. The action was taken to alleviate low crude prices and the cash squeeze on its energy industry. These are the first provincial government-dictated production cuts in Canada since the 1980s.
In the US, signs of strain are already visible in the oil industry. Low US gasoline refining margins have turned negative against major US and European crude slates. This is causing huge loses to US refiners who can’t lower refining capacities because they have to produce middle distillates in addition to the light distillates to produce gasoline through this process.
The strong growth in seasonal demand for middle distillates has driven increased gas oil (diesel) prices and refining margins. Therefore, low gasoline yields and high gas oil refining margins have resulted in refiners maximizing diesel output instead of gasoline production.
The EIA reported that by the end of November, high gasoline inventories helped drive US refining margins to five-year lows. This is coupled with high levels of refinery output as US refiners keep refining at high capacity. That has contributed to low gasoline refining margins globally.
US gasoline prices declined for the ninth consecutive week. The US has continued to export gasoline despite the decline in domestic gasoline stocks. For the last week of November, the US exported more crude oil and petroleum products than it imported since records were kept beginning in 1991.
Gasoline refining margins in Europe turned negative in mid-October for the first time in nearly five years amid high inventories and weaker demand in the Atlantic basin. Since then, Europe’s refineries have reduced their gasoline output and depended more on gasoline imports from the US. European refineries are now focused mainly on the relatively strong diesel refining margins.
- Faisal Mrza is an energy and oil marketing consultant. He was formerly with OPEC and Saudi Aramco. He is the president of #Faisal_Mrza Consulting. Twitter: @faisalmrza