Rigs moved higher again with another 9 being added- especially in key areas throughout Oklahoma. We expect to see more growth in the Mid-Con as well as in Louisiana. The U.S. completions market is continuing to grind higher, and we remain on target to hit about 290 spreads by the end of May. Labor and equipment prices keep heading higher, which will be an overhang on “how fast” we see spreads get added back into the market. It will be difficult to see a big spike, but rather a measured increase over the next 6-8 weeks. OCTG pipe just went up AGAIN, and we don’t see this moving lower anytime soon.
Another key piece is: why focus so much on OPEC+ compliance? They can't sell massively reduced quotas- so why would you increase your production? Angola and Nigeria alone are 200% compliant and STILL can't sell their full slate of scheduled exports. We had Angola slashing prices to move cargoes in the loading month… why would they produce at their allotted amount if they cant sell current volumes? We have a record amount of crude on the water and in transit and a huge backlog in China with more resales happening from their coast. Plus China is taking more ESPO as Russia shifts volumes from the Baltic to increase it on pipelines- so WAF is going to see renewed pressured on their slate. You also had Middle East floating storage spike because they put OSPs well over $9 so countries/companies took bare minimum term and left the rest in the market. There remains some spare capacity on the pipelines that can carry some additional capacity from Russia into the Pacific.
Russia pushes as much as possible into the market it pushes down the demand for WAF further. We have already seen WAF left in the market (Congo and Angola) as China/India increased purchases of Iran/VZ cargoes and underlying demand remained a bit soft. Ship and insurance are a huge issue but given the massive spike in India inflation and "surprise" spike in China inflation- the U.S. cant afford to push their prices up further. We will allow them to run as much Russian crude as they can get their hands on in the near future.
We have seen a drop in Middle East OSPs- which are still at a record- but at least closer to market value when comparing Brent vs Oman/Dubai. This puts the spread between $4.50-$5 above Oman/Dubai, which is much closer to Brent.
This was driven by term buyers minimizing allocations and leaving more in storage as we can see below:
These shifts in the market are putting a record amount of crude on the water, and we don’t see that shifting as miles per ton keep increasing.
We are also seeing a wide divergence in pricing for “quality of crudes” with heavier crudes or crudes with a higher distillate cut trading at a richer premium due to the spread between gasoline and diesel. Refiners are trying to increase their distillate production as much as possible while trying to limit gasoline.
Diesel remains front and center in many people’s minds as the East Coast faces a growing shortage. We have had a re-acceleration of pricing in the U.S.- reaching new all-time highs. We expect to see diesel prices pushing past $5.60 but next week as the global tightness persists.
Global storage levels for middle distillate remains at or near record low levels helping to support prices at these levels. Singapore remains at the lowest level we have seen since 2018 and before that 2008. Indian diesel demand increased last month, and we don’t see that dipping in the near term keeping the Asian markets fairly tight. India also increased their exports of diesel/gasoil into the European markets, which will keep the “East of Suez” region tight and support elevated refiner crack spreads. The diesel market is carrying refiner margins right now because gasoline stocks are building globally- which poses a bigger problem as we get into June/July- especially if we get a weaker summer driving season (our base case).
Europe is no different with near record lows- the only time it was lower was 2008. The arb opened up to send diesel from the U.S. Gulf Coast (PADD3) to Europe from the middle of March to the end of April. The arbitrage is now closed, and we will see more getting moved from the Gulf of Mexico (PADD 3) to the East Coast (PADD 1).
The U.S. has a sizeable shortfall- but it isn’t equal across all regions. The lion share of the shortfall is in PADD 1, which is being caused by several issues:
1) The drop in refiners available on the East Coast- The last being the Philadelphia Energy Solutions refiner that blew up in June 21st, 2019.
2) Cargoes were flowing from PADD 3 to Europe based on the arbitrage
3) Homes in New England and the tri-state area use ultra-low sulfur diesel instead of heating oil
4) Ban on Russian imports – a large part of it was diesel into PADD1
PADD1 is at a RECORD low on the distillate front with fears of rolling shortages when it comes to diesel availability.
The Colonial Pipeline Co.’s main distillates line (Line 2) saw demand rise to meet capacity, which was indicated when they froze nominations earlier this week. The first batch of disty will reach Linden, New Jersey, in early June, the latest pipeline schedule shows. Faster relief will come by ship with over 2M barrels of diesel expected to offload in New York starting Thursday through June 6, according to estimates from oil analytics firm Vortexa. These include ships from South Korea, Europe, Saudi Arabia and the United Arab Emirates. Among them is a Greek-origin vessel that was diverted to New York from its original destination in Spain earlier this week, Vortexa data show.
Diesel resupply from the pipeline has only recently turned profitable, even though the East Coast has been short on fuel for months. That’s because of the backwardation in the market — where forward prices have traded at a steep discount to prompt deliveries — making exports a more lucrative option. Shipping fuel on the pipeline — which takes weeks to reach its destination — risked losing money. The backwardation in the diesel market has eased this month, making the pipeline arbitrage viable again.
The below chart of PADD 3 shows that there is enough product available to flow to PADD 1.
The Gulf of Mexico has been shipping product to Europe, but as the arb closed- they have turned back to shipping by pipeline or purchasing product from abroad. The spike in exports happening in late March/ Early April but will slow down back to the average as more product gets put on Line 2.
We expect to see distillate exports to drop back to the 5-year average but given the dynamics in the global market- remain elevated.
Gasoline is a bit different given the storage backdrop- Europe is at a record/ Singapore is near record/ U.S is normal (except in PADD1). PADD 1 is the driver of the low storage levels for gasoline with the rest of the U.S. sitting at normal levels.
PADD1 gasoline storage sits at 1997/ 2006/ 2011 levels while things are well above normal in PADD3
PADD3 gasoline levels sit at 2021 levels with only 2020 being a higher year. The point will be to get product from GoM to PADD1, but we expect to see a bigger shift in gasoline from Europe into the East Coast.
When we turn to Europe- gasoline is at a record level, and the refiners will have to manage the storage systems here and PADD1 has more than enough room.
Light distillates in the Middle East and Singapore are also showing large builds that will persist. Now that Ramadan is over- the demand is going to be reduced over the next few weeks that will keep Singapore elevated.
The problem is- when you make diesel you inherently create gasoline on about a 1 to 2 ratio. We are already seeing headwinds for driving and gasoline demand throughout the summer season. The U.S. driving demand is sitting at levels not seen since 2014, and we don’t expect to see a big step up given gasoline prices at the moment.
We expect to see demand “flat-line” around these levels in the near term with more headwinds coming as emerging markets cut subsidies.
Given the price spikes globally (especially in the U.S.)- we expect refined product demand to stay under pressure. We have seen mobility fuels fall below 2021 levels and given underlying pricing and a slowdown in supply chains- demand will remain here.
Regards,
Freedom Financial News
