Positive developments in the US refining industry and natural gas output, combined with the resolution of a strike at Europe’s biggest refinery and slowing Asian demand over the last couple of weeks, triggered bearish sentiment in the product markets. Recently, this situation has been further exacerbated by the mild winter,
particularly in the US Northeast, which resulted in a significant drop in product prices and refinery margins across the globe from the previous month.
Refinery margins for Brent benchmark crude oil in Rotterdam plummeted by $3.18/b or 25% in October compared to the previous month. Asia experienced the same trend as the Dubai benchmark margin in Singapore dropped by about $2/b or 16%. In the US Gulf Coast, despite the earlier strength of product prices against crude, the WTI benchmark margin plummeted by $7.07/b or 34.5% to stand at $13.40/b in October. More recently, lower prices for various products have caused refinery margins in the USA to decline further in tandem with other markets. Despite the recent declines, refinery margins still look healthy and could lend support to crude demand. Furthermore, as the US market remains short of middle distillates, a cold snap could reverse the current bearish sentiment and provide support for both product and crude prices.
Apart from the product market movements mentioned above, there were some positive developments in the US refining industry as a major part of the hurricane-affected capacity has recovered, although some 850,000
b/d of capacity remains offline. While utilization rates surged to 78.9% from below 70.0% in late September, this is still low in historical terms for this time of the year. Tthe utilization rates in Japan rose by 5% in October from the previous month to reach 83.8%. In Europe, utilization rates remained at around 90%. US market Following Hurricane Katrina, most market players and analysts focussed their attention on low gasoline stocks in the USA which raised fears of a gasoline shortfall. This concern was reflected in gasoline prices which diverged sharply from crude prices early in the month following Hurricane Katrina. But with the recovery of the US refining industry and the maximization of gasoline output, as well as high imports and relative slow-down in US gasoline demand,
the market sentiment changed, and the earlier strength of gasoline has diminished significantly. Market participants have consequently switched their attention to developments in the heating oil market.
The gasoline crack spread in the US Gulf Coast against WTI crude oil has dropped from above $60/b to around $15/b in late October. Gasoline demand in the USA recently soared to over 9 mb/d, but has failed to lift prices due to improving inventory levels. In the USA, middle distillates have taken over the driver’s seat of the market since early October as a contra-seasonal stock-draw over the last few weeks has heightened supply fears for the coming winter and lent support to heating oil prices. The recent warm weather in the US Northeast has put
pressure on crude and product prices, but due to rising demand and a possible shortage of natural gas, a cold snap could trigger the new upward trend for distillate prices over the next months. As of the end of October, natural gas storage in the USA has been 4% below last year, while about 50% of US Gulf Coast gas output has remained shut in. Similarly, low sulphur fuel oil prices have been supported by the impact of Hurricane Wilma, which forced the closure of a key storage and blending hub in the Bahamas, as well as higher demand from utility plants.
The resumption of operations following temporary strikes at Total and Shell refineries, the completion of autumn
maintenance and the flow of Baltic and Asian export barrels to Europe, have combined with the lack of export
arbitrage opportunities to the USA due to high freight rates to put pressure on various product prices in Europe. The crack spread for the barrel complex cut against Brent benchmark has slid since the middle of October. This situation was worse for gasoline, as the end of seasonal demand caused its spread to fall even further. Similarly, unseasonably mild weather depressed heating oil demand across Europe amid ample supplies. The diesel market was also very sluggish both in North-West Europe and the Mediterranean area. With regard to jet/kerosene, the market is facing the same bearish momentum due to ample supplies from the Middle East. However, with the emergence of cold weather and the improvement of westbound arbitrage opportunities, the middle distillate market should recapture part of its recent losses. The European fuel oil market was also supported by export opportunities to the USA in early October, but warm weather in Southern Europe, along with reduced arbitrage opportunities to the USA and Asia-Pacific, have recently dampened both the low- and high-sulphur fuel oil market in Europe and widened the discounted crack spread between the bottom of the barrel complex and benchmark Brent.
In early October, the Asian market was supported by favourable arbitrage opportunities to the west. However, since then, these opportunities disappeared due to high freight rates for clean product carriers. Additionally, high stocks of jet/kerosene in Japan and South Korea further deteriorated the bullish sentiment of the middle distillate
market and reduced earlier gains for the middle of the barrel complex. Likewise, as mentioned previously,
the trimming of demand in Indonesia due to the removal of a major part of the subsidy by the government has fuelled the bearish sentiment of the middle distillate market in Asia. Apart from middle distillates, gasoline has also lost ground in Asia due to lack of exports to the USA and falling regional demand. But the market for naphtha was relatively firm because of tighter supplies from the Middle East and stronger demand from Northern Asia. As far as high sulphur fuel oil is concerned, the market sentiment in Singapore remained strong due to persistent market tightness and high demand for bunkers. The crack spread of high-sulphur fuel oil against the Dubai benchmark narrowed to around -$7/b in late October from nearly -$10/b in late September. However, due to increasing arbitrage cargoes to Asia, the spread may lose its current strength in the coming months.