KBC has released its latest Oil Market Report for June 2015. Brent crude prices rose to a six month high in May, and nearly US$5.00/bbl higher than a month earlier. Traders saw some light at the end of the tunnel following five weeks of consecutive drops in US commercial crude inventories as well as a falling rig count. However, crude imports have decreased to less than 7 million bpd, while refinery utilisation rates in the US are hovering around 93%, thus limiting stock builds. According to KBC, this is likely to have two consequences. Firstly, crude oversupply is likely to move to other parts of the world as key exporters are unable to sell their crudes into the world’s largest market. Secondly, the crude surplus is likely to be transformed into a refined product glut. Oil prices eased slightly in early June, as the market waited for indications on supply levels from the OPEC meeting in Vienna.
US refiners are processing more North American oil and shun crude from other parts of the world, according to the Oil Market Outlook. West African flows are likely to face stormy waters due to a wide Brent/Dubai spread of more than US$2/bbl, coupled with higher freight rates, making it difficult to send these barrels to Asia. The end of maintenance at the Hound Point terminal’s VLCC jetty, scheduled for the start of the second week in June, would mean more competition for the light sweet market in Asia as it could encourage refiners in South Korea to profit from its free trade agreement with the EU. Nigerian crude differentials are already showing multi year lows. Angolan crude differentials are an exception as Chinese refiners are accustomed to processing their grades. A tighter medium sour market in the Mediterranean is also forcing refiners to look for alternatives, such as Angolan crude, which they can blend with cheaper Caspian and North African crudes.
The summer air conditioning season, as well as rising refining capacity, means that Saudi Arabia is using more of its heavy crude at home. As a result, the advent of Basrah Heavy should have been welcome news after the shutdown of most of the heavy oil production in the Neutral Zone. However, refiners are hesitant to buy crude from a producer well known for its crude quality problems. Consequently, Basrah Heavy has recently been sold at a significant discount to its official selling price. Nevertheless, once refiners get accustomed to the crude as its quality becomes more stable, they are likely increase their intakes of the crude. Therefore, the future is bright for Basrah Heavy. In fact, if Iraq is able to boost its heavy exports, Latin American crude differentials to the Far East and the Mediterranean could come under pressure.
As there is no change in policy at this week’s OPEC meeting in Vienna, OPEC output will remain well above 30 million bpd through the summer months as domestic demand for electricity peaks and members look to retain market share and maximise much needed revenue. Production could be even higher, but for the expected volatility in Libyan output and increased security worries in Nigeria and Iraq potentially reducing volumes. Iranian output is unlikely to rise significantly by year end, even if sanctions are lifted completely at the end of June. Hedge funds and other speculators started to have doubts about a price recovery and pared their net long positions in Brent futures and options on Intercontinental Exchange (ICE) sharply to 222 816 contracts in the week to 26 May, the lowest level since the end of March.
Refining margins were mixed across the three key regions in May, compared with levels in April. European conversion margins eased below US$6.50/bbl in May, dragged down by sharply weaker naphtha and fuel oil cracks, despite marginally better gasoline and diesel cracks. Singapore complex refining margins edged higher in May and rose above US$7.00/bbl, boosted by stronger cracks across the barrel except naphtha. In the US, gross margins for both FCC/Coking Maya/Mars and LLS 3-2-1 (which is heavily weighted to gasoline) strengthened, supported by improved cracks across the barrel except fuel oil. Gasoline cracks strengthened after the US Energy Information Administration (EIA) inventory report showed stocks dropping for three consecutive weeks to 220.6 million bbls at the end of May, down by 6.8 million bbls from the level at the end of April.
Adapted from press release by Rosalie Starling
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