RIYADH: Oil prices continued to rise slowly for a second consecutive week, reaching a three-month high. The US crude oil inventory build could not push oil lower. Brent seems to have moved back above $70 per barrel amid a tight market.
Output by the Organization of the Petroleum Exporting Countries (OPEC) has fallen sharply over the past two months to its lowest level in four years, to 30.8 million barrels per day (bpd) in January, causing any oil surplus to disappear. This might move the oil market into a deficit toward the end of the first quarter.
By the weekend, Brent crude rose to $67.12 per barrel and WTI rose to $57.26 per barrel. The Brent / WTI spread remains wide at $9.86 per barrel. The wide spread helps traders to hedge US crude oil exports that help increase the flow heading East.
This is the reason behind US exports jumping to above 3 million bpd in the last two weeks. The Energy Information Administration (EIA) reported US crude output at 12 million bpd for the first time last week, up from 11.9 million bpd the week prior.
The surge in US crude oil exports has brought stronger competition for West African light sweet crudes heading to the Asian market, as the arbitrage economics remain highly favorable for more US crude purchases, especially with lower freight costs to Asia that have fallen by about a third since early December 2018, S&P Platts Global reported.
OPEC output cuts kept Dubai crude relatively expensive amid medium / heavy sour crude tightness in the market. This supply tightness pushed Dubai crude’s discount to Brent to narrow to a record low in January and early February.
However, the Dubai benchmark moved steadily higher and reached a premium of $0.20-$0.30 per barrel to Brent by mid-February. This has led to robust trading activities in the physical market amid tightening medium / heavy sour crude oil supplies, which was further tightened after the loss of the heavier Venezuelan grades that made heavy crudes priced more competitively.
Global refiners already suffer from poor refining margins for naphtha and gasoline (the light ends of a crude barrel), while rising US production puts more light sweet crude oil in a global market that is already saturated with these crude supplies, necessitating refineries worldwide to sweeten their blends as much as they can economically handle.
Since the global market is already soaked with gasoline and naphtha refined products, that is depressing refining margins, while refiners are having to pay more to secure supplies of the medium / heavy sour crudes. The constrained medium / heavy crude market has supported fuel oil prices that have escalated, while its inventories are at low levels, especially for high-sulfur fuel oil.
- Faisal Mrza is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalmrza.