- Read below to discover the Singapore oil that’s booming
- Was OPEC+ smart to make the cut because they saw it coming or was the reduction in the supply the driver?
- The biggest concern following the OPEC cuts
Dear Reader,
The major agencies have adjusted their estimates for supply/demand of crude following the OPEC+ cut. Even with the adjustment, we are still going to see a pretty balanced 2023, which is tighter vs initial estimates. The tighter assessment makes sense following the broad reduction in supply, but the question now shifts to underlying demand as margins implode for refiners.
The biggest demand drivers are hurting, and the questions shifts back to: “Was OPEC+ smart to make the cut because they saw it coming or was the reduction in the supply the driver?” There is probably truth in both statements, but Saudi keeping OSPs elevated is a much bigger problem for refiners. The crunch on margins has been our biggest concern, especially on Asian refiners.
The Biggest Concern Following the OPEC Cuts
We have been consistent with our biggest concern being the Asian diesel (gasoil) crack spread. The below chart puts into perspective just how big the hit has been, and the pressure continues to the downside. It currently sits at 13.8, which continues a steep drop from the high of 65.1 on June 20th, 2022. We don’t see much support for crack spreads in the near term, and as gasoline (light distillate) storage remains at record levels- the pain will only persist.
There has been a big increase in exports of Chinese product into the market that has depressed cracks further. It has been a straight move down with little pause even as Chinese refiners reduce runs in April and likely May.
This Singapore Oil Remains at Record Setting Levels
The below chart looks at Singapore storage of Light Distillate, and you can see how it remains at record setting levels on a seasonal basis (see the bolded light blue line). It just recently dipped slightly below 2020 levels, which was expected as some buying picked up ahead of the Eid holiday, which marks the end of Ramadan.
Even with a major Muslim holiday, we don’t see inventories dipping by much as flows continue to move into the market. This just highlights that the gasoline crack isn’t coming to save the refining complex, and they are forced to rely heavily on the middle crack spread.
Singapore storage of middle distillate remains on the low end, but it’s still above 2022 levels, with more pressure coming from the economic slowdown as well as Russian and Chinese exports. Storage levels have moved back towards 2022 levels, but we are heading into the Eid holiday, so a drawdown of storage is normal. Following the holiday, there is usually a period of builds, which will drive builds back to the seasonal average.
The Driver Behind Deteriorating Oil Spreads
The confidence in that view stems from flows originating from Russia, China, and builds/spreads in Fujairah. Here is a good quote summarizing the builds in Fujairah and the driver behind deteriorating spreads: “Stocks of middle distillates, including diesel and jet fuel, increased by 945,000 barrels or 37.9% on the week to 3.439 million barrels.
The East of Suez gasoil complex remained under pressure on April 18th, weighed by supply-side fundamentals. Brokers pegged the front-month Singapore gasoil time spread at plus 20 cents/b during intraday trading on April 18th, narrowing slightly from a more than 19-month low of plus 21 cents/b at the Asian close on April 17th.
The spread was last narrower at 20 cents/b on Aug. 31, 2021, S&P Global Commodity Insights data showed. “Asian demand is stable but the market is not good with more gasoil in the region,” said an Asian refinery source.
Asian gasoil traders said Persian Gulf- and Indian-origin gasoil cargoes were being directed to the region, driven by poor East-West arbitrage economics. “The possibility of incremental volumes adding to Asia’s supply weighed on the market.”
I’ll be back tomorrow to share with you how Chinese refiners hit record highs in March.
Thanks for reading,
Derek Wahler
Managing Editor, Freedom Financial Daily
Freedom Financial News
