Doubts Over OPEC Cuts
Crude prices have dropped this morning due to the less optimistic picture among the OPEC+ oil cartel than we had yesterday. Russia and Saudi Arabia may have agreed to support each other on an extension to the cut agreement, masquerading as an oil version of the resolution to the film Step Brothers, but they haven’t agreed on a meeting of the rest of OPEC. This does make the rest of us think “have they really agreed to support each other, or have they just pushed out this statement because it’s in both their interests to keep prices high?” I know you all know the answer to this, and it therefore explains why things don’t seem quite as bullish as the headlines would suggest.
Refiners Aren’t Out of the Woods Yet
The refining industry, like much of the oil industry as a whole, has been hard hit by the shut downs across the world to deal with the virus outbreak. Refiners in the US are now going to have to deal with a hurricane. Storm Cristobal is expected the enter the USG this week and hit landfall in Louisiana on Sunday. As the Gulf accounts for 45% of the US refining capacity and a majority of its exports, this could significantly impact and already embattled industry.
With margins for fuel oils and gasoils rising as demand increases and refineries try to catch up after being in no or low production, it’s expected that this could further push up crack levels for these products and impact those areas who would usually rely on US exports.
The black sheep in all of this is the jet market. This market has not just been suffering from a lack of ability in the refining sector, it has been hit by an even bigger drop in demand. This has been caused by the grounding of aircraft across the world, as the air passenger market ground to a halt and isn’t going to be coming back to full strength anytime soon.
Diesel is Down and Out
Diesel doesn’t look like it’s having the best time of its life currently, and its problems look like they are going to continue for the foreseeable future. In the United States, the volume of distillate supplied to the domestic market is still almost 14% below the same point a year ago. Manufacturing activity is still down across the world with the US dropping even further than its April record low, and the Eurozone showed a continued drop of activity in May, although not as severe as in April.
Gasoline consumption is picking up, but distillate is more closely tied to the business cycle, and will be hit by an enduring lagging of industrial production. This situation is also made worse by the surplus of jet fuel which is being blended down into the distillate pool.
2+2=5
Those scrutinising the US oil inventory data have come across a peculiar thing, that the numbers just don’t add up. Various data sets are pointing to the fact that the current official figures on some products are excessive. This could be a discrepancy between the implied levels of stocks through production calculations compared to stockpile figures, but at the moment this still remains unclear. Others are looking at the negative pricing of US oil and arguing that this should have caused a bigger drop in US production than is being currently represented in production stats. Daily output is down 700k bpd to 11.2 mil in May, but this doesn’t seem to be enough.
(FIS)