NEW YORK: Refinery maintenance worldwide is exceptionally heavy right now, with work directly affecting all three global oil price benchmarks. Crude has eased from its February highs as a result, but this downshift may soon be at an end.
The travails of US West Texas Intermediate crude are well known, with a fat schedule of planned refinery shutdowns helping to curb gains in the contract even as the supply-and-demand picture for the grade appears to be becoming more balanced.
Similarly, extensive shutdowns in Russia have freed up spot volumes of Urals blend crude just as planned work in Western Europe has begun, pushing its discount to Dated Brent to near $ 3 a barrel in late February.
The weakness in Urals has in turn weighed on North Sea Forties blend crude, the grade that typically sets the Dated Brent price. That has helped keep Brent crude futures in check.
Lastly, supplies of Oman, the most plentiful stream that can be delivered against Dubai swaps, the Asian crude oil benchmark, have been lifted by planned work at the country’s 116,000-barrels-per-day Sohar refinery just as Asian refineries enter an extensive turnaround season of their own. As a result, all three benchmarks have wallowed in recent weeks even as global equity markets scaled new highs, prompting some investors to wonder why oil has missed out on the rally.
These concerns miss the mark. Oil is treading water for real, fundamental reasons, namely planned refinery work. But turnaround season will soon be at an end, and once that happens, crude intakes will rise in anticipation of summer peak demand.
Some analysts seem to be getting too caught up in the moment without recognizing the impact of changing oil flows on yearly oil trading patterns.
A decade ago, the second quarter was a time of slack in oil prices since that was when refineries shut for work. But increasingly this slow period is being pushed into the first quarter, driven by the rise of Asia as a major oil consumer.
Asian refiners must make buying decisions far ahead of Western plants. With sailing times from West Africa to ports in China in excess of four weeks, Chinese refiners, for instance, are buying cargoes two to three months in advance of when the final product will be sold to consumers.
Thus, Asian buying of West African grades can be expected to slow in January and February (when the market is trading February- and March-loading cargoes, respectively). Western plants, on the other hand, will not slow buying until late February or early March given much shorter sailing times.
Indeed, with Asian refinery maintenance seen this year at an “exceptionally heavy” 1.7 million bpd of capacity in March, according to the International Energy Agency, the slowdown in Asian buying has likely already peaked.
Asian buying of West African crude resumed in March as these plants prepared to return to service in the summer. However, the impact of these purchases on the Atlantic Basin market was muted by the fact that Northwest European refineries were starting to slow buying of short-haul crudes from the North Sea and Russia in anticipation of their own turnaround season.
This resumption of purchasing has flown under the radar. European crude markets, which focus on very prompt cargoes loading only a few weeks ahead, have been slack in recent weeks, due to heavy turnarounds. This has masked the considerable strength in West African markets where April-loading (and hence May-arriving for Asian buyers) cargoes were strong.
Now as Europe shifts toward trading April-loading cargoes, signs of a recovery in the market can be detected. Urals discounts to Dated Brent have declined and the physical North Sea market, while still in contango for prompt deliveries, is climbing out of the doldrums.
Similarly, cash crudes in the US for April pipeline injection were extremely strong this month, rising above Dated Brent and signaling a robust return from planned shutdowns.
On balance, global crude oil runs are not expected to recover fully until June or July, according to the IEA, and will remain below fourth-quarter rates. But critically the market is nearing the trading window when Asian refiners start buying supplies for running in the third quarter.
Dealing in May-loading West African cargoes — those that will arrive in Asia in June — is about to begin in earnest. This is precisely when global crude runs are expected to rebound “in a big way,” to use the IEA’s words.
As such it is reasonable to expect physical Brent markets, and linked derivatives, to start recovering soon. From there, as the noise from turnaround season fades, demand will take center stage. Refined product prices have not kept pace with the strong showing for West African or US Gulf Coast cash grades recently, suggesting a risk to refiners that they may not be able to pass on the full cost of expensive crude to consumers.
But interpreting demand is increasingly challenging. US weekly oil data on apparent demand has been distorted by the country’s emergence as a major oil products exporter and the difficulties faced by statisticians in tracking shipments overseas in real time.
Similarly, forecasts of demand in emerging economies have struggled at times to capture pockets of new consumption given the opacity of stocks data and the invariable challenges in visualizing differing rates of growth in a system that is rapidly expanding as a whole.
Likewise, soaring consumption in major oil producers such as Russia, Saudi Arabia and Brazil is not immediately noticed. Already traders are warning of gasoline shortages in Russia this summer as the country shifts to cleaner fuel specifications that may force it to import fuel from Belarus. Brazil has become a net importer not only of refined products but also crude oil amid production shortfalls and rapid demand growth. And Saudi Arabia’s voracious appetite for its own oil, combined with the commissioning of a new refinery at Jubail, could easily diminish the impact of rising output from the Kingdom in the coming weeks.
Countering these risks are the economic malaise in Europe and the slow pace of economic growth in the US, which, combined with efficiency measures, are keeping a lid on fuel consumption in the developed world.
But on balance, the risks in the market look skewed to the upside. World oil prices have held above $ 100 a barrel even as huge numbers of refineries shut for maintenance. As the world moves into peak oil demand season, higher crude prices seem likely.
— Robert Campbell is a Reuters market analyst. The views expressed are his own
