Global oil and Asian product market, June
The physical market came under quite marked pressure over the first half of June with prompt assessments moving to a wider discount versus forward assessments. This has reportedly been driven by a buildup of floating volumes around the ARA hub. Pressure is currently disproportionately weighing on Brent, and though balances remain generally supportive, this specific factor is expected to act as a drag on prices in the near term.
But during second half of June, prices regained some of the week’s losses as OPEC members reached an agreement to reduce the level of their conformity to 100% rather than 160%, and raise output. In other words, according to the news broadcasted on the discussions at the 174th meeting of the OPEC Conference held on 22 June, in Vienna, Austria,OPEC-12 will strive to adhere to its overall conformity level under the OPEC / non-OPEC deal down to 100%, resulting in additional production of around 700,000 b/d.
Despite continued declines from Venezuela and some slight decline from Iran due to US unilateral sanctions, OPEC output is forecast to be some 400,000 b/d higher in Q3 compared to Q2.
Some market analysts assume a mild impact from the sanctions on Iranian output later this year, but over 2019 supply recovery is expected. More specifically, there might be a temporary drop of some 350,000 b/d by the end of this year, but the impact is set to be limited to 100,000 b/d on annual average y-o-y in 2019.
Asian Product Markets
Light Distillates (gasoline, naphtha)
The naphtha market is being dragged down by the wider weakness in the gasoline complex. With mogas oversupply likely to persist over the coming weeks and limited additional demand expected from the petchem side, the naphtha cracks remaining under pressure.
In Asia, turnarounds are set to peak this month, and Chinese demand growth in particular is likely to see more upside ahead in light of steam cracker additions earlier this year. This should help limit the downside cracks going forward and support arb flows from West to East.
Gasoline cracks fell strongly over the last month, as crude intake picked up and higher retail prices almost certainly weighed on demand. Regional inventory levels remain high and are now well above the five-year average, providing further pressure on the east of Suez gasoline complex. Meanwhile, there are strong signals that global gasoline oversupply will continue through the summer ahead.
Middle Distillates (gasoil, jet fuel)
Gas oil/diesel cracks in the Asia have been on a downward trajectory over the past few days as strong crude intake growth in Asia is creating a surplus in supply, although the pull on arb volumes from the West remains firm. Some further pressure seen as refiners continue ramping up runs, while the start of the monsoon season in Southeast Asia starts pressuring diesel demand in India (-60,000 b/d m-o-m in June). Additionally, competition from US and Russian diesel exports in the European market should increase. China as an increasingly bearish factor for the rest of the year with preliminary data showing another strong month of product exports in May and with marginal observations pointing rather towards a relaxation of government control over export levels.
Jet/kero cracks fell recently amid strong supply growth and seasonally weakening demand for kerosene. However, relative strength versus last year is persisting, with a firm pull on arb volumes from Europe and US West Coast providing a floor. Asian jet/kero demand increased by 120,000 b/d y-o-y over January-April and strong demand growth is forecast to persist firmly above last year.
Fuel Oil
Singapore fuel oil cracks are entering their seasonally strongest period of the year and this has already shown up in healthier cracks. Supply-side support is coming from decreasing fuel oil yields, as more residue is channeled into asphalt production – although strong crude intake growth is preventing supply from falling too low. On the demand side, support is coming from increased power generation demand in the Middle East.
However, the upside in cracks is forecast to be limited given the point that steeply backwardated market structure should see a significant shedding of stocks over the summer. This is also underpinned by a forecast lengthening in the Asian balance of 100,000 b/d over H2-2018 relative to H1.
Pakistan ramped up fuel oil imports to 120,000 b/d in May, much higher than the 15,000 b/d seen over the first four months of the year. Tender data indicates that the trend should continue over the summer, albeit at lower (<90,000 b/d) levels. Pakistan’s fuel oil purchases have an outsized role on the Asian fuel oil market as the country imports low-viscosity material, something that impacts the Singapore viscosity spread by tightening availability.