Volatility favours products, not crude

Speakers told the Appec conference in Singapore that there is ‘tightness in pockets' of the market, writes Azlin Ahmad, Prethika Nair and Reena Nathan

Opec+ output cuts have given a steady boost to crude prices, while years of refinery closures are concentrating volatility in product markets.

"[Crude] feels volatile but in reality, it has not been that volatile," Vitol chief executive Russell Hardy told the Appec by S&P Global Commodity Insights conference in Singapore on 4 September. "Volatility is coming from products because refining capacity is very, very tight," he says. "Lots of refineries closed during Covid and the west really does not have the product-making capacity it needs now, now that Russian exports are making their way to Asia."

Refiners shut 1.8mn b/d of capacity in Europe and the Americas in 2020-22, figures in the Energy Institute's Statistical Review of World Energy show (see graph). Europe alone lost 4pc of its refining base, leaving it reliant on longer-haul supplies when the EU and the UK halted imports from Russia in the wake of its invasion of Ukraine. Middle distillate inventories, in particular, are low.

Crude has crept slowly past $90/bl as Saudi and Russian output and export cuts tighten the market. But the flat price of crude does not capture the full story of tightness along the supply chain, Trafigura's co-head of oil trading Ben Luckock says. "The market is quite relaxed that this is the fair price of oil given the supply and demand balances… probably a bit too relaxed," he says. "The gasoil structure, which is incredibly strong at the moment, shows you that there is some tightness in pockets of this market." Backwardation has intensified on gasoil forward curves and prompt prices are now $2-3/bl above second-month markets.

Refiners are bridging the gap left by Opec+ cuts by calling on stored crude. Onshore crude stocks have fallen by over 70mn bl and oil in transit is down by another 63mn bl since the end of July, data from Vortexa show. There may be some short-term easing in crude drawdowns as refiners begin maintenance in the next six to eight weeks, but supplies of sour crude remain tight, Hardy says. "The sour crude market, because of Opec+ cuts, does not have sufficient supply for all these complex refineries that have been built," he says, referring to new capacity in Kuwait, Saudi Arabia, Oman and China. "Everyone is buying sour crude, which is not really a ‘western supply', it's really a [Mideast Gulf] supply, plus Russia."

How sweet it is

"The price is going to the point of equilibrium where sour [crude] economics, which should always be better than sweet [crude] economics, have more or less evened out," he says. Rising exports of US light sweet WTI are making up some of the sour crude shortfall, Hardy says.

More sour crude could come from countries under sanctions. Exports from Venezuela could rise slightly with more licences made available, Hardy says. But he does not expect a big jump in Iranian production even if sanctions are lifted, as the country's exports have been creeping up in the past couple of years (see graph). Iran has boosted its crude production to 3.3mn b/d and output is expected to rise to 3.4mn b/d by the end of September, oil minister Javad Owji says.

Sanctions on Russia have led to a partitioned oil market, according to other speakers at the conference. But supply chains have coped remarkably well with the redirecting of large amounts of Russian oil to Asia-Pacific. "The market has been efficient enough to reroute the flows," Gunvor global head of research and analysis Frederic Lasserre says. "We have not seen any shortages anywhere."

A large part of that is the willingness of Indian refiners to buy Russian crude. But these shipments have been falling as delivered prices rise. Imports have fallen by 600,000 b/d in the last two months. "It is a price sensitivity issue," Indian oil minister Hardeep Singh Puri said in a televised interview in August.

Europe/Americas refining changes

Key Opec+ sour crude producers