Commodities | May 04 2012
– Some evidence of a tighter oil market
– Correction in gasoline market may weigh on oil price
– Refineries and emerging supply pressures
– Overall, oil market views remain mixed
By Chris Shaw
When looking at the global oil market, Barclays Capital suggests a high level of refinery turnarounds and strong OPEC output are masking what continue to be supportive demand conditions.
OPEC of late has been producing at well above 31 million barrels of oil per day notes Barclays, which is helping offset much of the weakness in non-OPEC supply growth. The result is there has not been a shortage of oil since the start of the year.
As evidence, Commonwealth Bank notes the latest US Energy Department report showed US crude inventories of 375.9 million barrels, which is the highest level for the past 21 years. The bank notes the increase in inventories can at least in part be linked with increasing US production and imports.
But in the view of Barclays the physical picture is starting to pick up again, with some early signs of an improvement in US oil demand conditions. At the same time, there have been large upward revisions in US gasoline and distillate demand.
Japanese demand has also been strong on the back of nuclear reactor shutdowns, while Barclays notes European demand comparisons are gradually improving after weak demand conditions thanks to a warm winter.
This leads Barclays to suggest the June quarter may show a significantly tighter oil market than had been expected, as stronger demand should limit the extent of any stock build during the period. Add in the fact refineries are returning from record maintenance and Barclays expects prices will find some traction in coming months, independent of any Iran effect.
Standard Bank appears somewhat more cautious, suggesting the bullish gasoline story appears to be over as strength in the first few months of 2012 had pushed the market ahead of fundamentals and prices are now correcting.
There are three reasons for this in the view of Standard Bank, the first being US gasoline demand is falling quickly given a fragile economic recovery and still high oil prices. Secondly, an expected supply crunch in the Atlantic Basin has never materialised, while finally US gasoline inventories remain at comfortable levels.
For Standard Bank the fact gasoline cracks and time spreads have seen some selling pressure suggests market weakness will begin to weigh on refinery margins. This is expected to keep pressure on the oil market in general.
Looking at the global oil market more broadly, JP Morgan notes while the bulk of the world's space production capacity is in Saudi Arabia, China has about two million barrels per day of independent refining capacity currently running at only 30-40% utilisation.
The significance for JP Morgan is if these independents were to quickly lift utilisation to more normal levels of 70-80%, as much as 800,000 barrels per day of products could quickly enter the market. This would seriously impact both regional and global refinery margins in the broker's view.
Further on refineries, Citi notes growth in unconventional output in the US is causing a shift in refining market dynamics, one that is expected to put additional pressure on marginal European refining assets. Citi estimates this production shift will see North American crude oil production grow by 4-5 million barrels per day through 2020.
The advantage for the US producers is lower cost, something Citi expects will result in Light Louisiana Sweet (LLS) crude trading at a US$2-$4 per barrel discount to Brent crude within the next 12-24 months. This shift will provide an advantage to US Gulf Coast refineries, while the losers will be the marginal European refineries with a high degree of light sweet crude processing, above average costs and with a reliance on exports.
Citi estimates as much as 24% of European capacity could face closure as a result, as European gasoline will be displaced in key markets. This means position on the cost curve will be very important with respect to a refiner's chance of survival.
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