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CONTENTS2 SUPPY/DEMAND

3 NON-OPEC SUPPLY

4 OPEC SUPPLY

5 DEMAND

6 INVENTORIES

7 REFINING

8 CRUDE OIL

9 FINANCIAL MARKETS

10-12 REGIONS

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Pressures Rise But Brent Price Has Nowhere to GoThe list of pressures on the oil price is impressive. In the physical product market, the switch to very-low-sulfur fuel oil is creating a massive disruption in both the crude and product worlds (p10). In the Mideast, the US is pressuring Iran to the brink of war, with Syria and Yemen boiling in the background. In the Mediterranean, Libya might again be losing all of its oil output due to domestic fighting. In the Atlantic Basin, non-Opec supply is rising super fast (p3). And yet, the Brent price has nowhere to go and is stuck in a small range that averages $65.

The downside of the price is covered. With the US-Iran situation unresolved, risk capital doesn’t want to bet on lower prices. Besides, hanging on to passive long positions reaps financial benefits as prompt oil is trading at a premium (p9). With the risk of a major oil disruption ever-present, refiners and traders are holding on to cargoes and not selling off (p8). Opec is committed to its pledge to restrict oil production, which cements a price floor (p4). The bunker fuel switch supports product prices. China is not done buying more crude for inventories and buys when the oil price dips.

The upside of the price is limited. A supply disruption is facing a wall of oil. Spare capacity is well above 2 million b/d and rising with Saudi Arabia and Kuwait bringing back Neutral Zone production. Strategic petroleum reserves in the OECD and China combined can mobilize more than 2.5 billion bbl of oil (p6). Somewhat forgotten, US sanctions have shut in close to 2 million b/d of Iranian production that can be switched back on. Non-Opec output is rising again more than 2 million b/d this year, outstripping 1.1 million b/d in demand growth (p5).

Only a massive supply disruption that wil take a long time to fix will push oil prices high-er. Likewise, only a massive drop in demand or breakdown of Opec commitment would cause the price to fall. As with the attack on Saudi Arabia in September, recent US and Iranian missile attacks in the Mideast have not moved the oil price out of its range for long. Much of the price moves were the result of a repricing of risk in physical cargoes, the options market and the futures market. Once cargoes, shorts and options were cov-ered, some longs took profits and deflated the price.

Absent a war in the Mideast, this equilibrium could well continue for a while to come. Demand growth might be slowing down, but so is non-Opec supply later in 2020. A clear-er view of the energy transition could be the fundamental catalyst to move the price, and not necessarily down if capital moves elsewhere. For now, the Brent price seems high enough to trigger sufficient investments to meet future demand. The Brent forward curve signals that the cost of marginal supply is around $58 – a price where the back of the crude has been trading since 2016.

VOL. 25, NO. 1

JANUARY 2020

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OIL MARKET INTELLIGENCE®

$45

$50

$55

$60

$65

$70

Jul'19 Aug'19 Sep'19 Oct'19 Nov'19 Dec'19 Jan'20

Brent Steady While World Burns

Nymex WTI weekly average ICE Brent weekly average

($/bbl)

Source: ICE, Nymex, Energy Intelligence

BRENT STEADY WHILE WORLD BURNS


OIL PRICE DRIVERS January TrendDemand È È

Opec-Plus Supply È È

Non-Opec Supply Ç Ç

Inventories È ¬¬

Refining Ç È

Financial Oil ¬¬ ¬¬

Geopolitics Ç ¬¬

Macro Ç ¬¬

Ç = fundamentals put upward pressure on oil prices

È = downward pressure

¬¬ = balanced

EnergyIntelligence WWW.ENERGYINTEL.COM OMI® JANUARY 2020

P2

Supply Flips Into Surplus, Politics Keep Brent HotA strong showing of non-Opec supply growth in the fourth quarter, especially in Canada and Mexico, has flipped global crude oil supply into a small surplus in the fourth quarter which is expected to carry through into the first quarter (OMI Dec.16’19). That surplus is set to deepen in the second quarter with the start of refinery maintenance (p8). But from the second half of the year, supply is set to fall short of demand and inventories can draw again (p6).

Economic growth is back on track, but new weather patterns are playing havoc with seasonal demand (p5). The Northern Hemisphere has in many places not seen much of a winter yet, lowering demand for heating fuels. Demand growth in December was just 900,000 barrels per day on the year and that restricted consumption growth for the year 2019 at just below 800,000 b/d (OMI Nov.20’19). It is unclear for now how weather will impact demand growth in 2020, for now seen at 1.1 million b/d.

The oil price is not much suffering from the arithmetic surplus. For one, the phys-ical market is kept tight by Opec cuts and US sanctions — it allows less physical oil into the market than typical seasonal flows. Also, strong inventory builds in China, for commercials and strategic purposes, are keeping the physical crude oil market tighter than balances would suggest. The price structure for Brent is in backwarda-tion, and this premium of prompt futures over later deliveries is keeping risk capi-tal in the market as this benefits from rolling contracts (p9).

In addition, politics are not creating a lot of prompt oil sellers. The Mideast and Libyan situations are so volatile that buyers hold on to their cargoes, happy to have oil. They also believe that Opec will deliver on its pledge to keep this market tight. Players in the paper are not keen to sell either. The US/Iranian crisis might see a lull in tit-for-tat missile strikes but is not resolved (p4). This prevents speculators from betting hard on lower prices and keeps Brent around $65.

S U P P LY/ D E M A N D

Click here to see SUPPLY/DEMAND data

95

97

99

101

103

Dec '17 Jun '18 Dec '18 Jun '19 Dec '19

(million b/d) Stockbuild

Supply

Demand

Stockdraw

Source: Energy IntelligenceSource: Energy Intelligence.

GLOBAL OIL SUPPLY AND DEMAND

(million b/d) 2019 2018 2019 2020 Demand Oct Nov Dec Dec Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 YearOECD-34 47.8 48.4 47.3 47.3 47.8 47.7 47.0 48.1 47.8 47.6 47.6 47.0 48.2 48.0 47.7

Non-OECD 53.6 53.4 52.8 51.9 51.8 52.7 52.4 52.7 53.3 52.8 53.3 53.5 53.8 54.4 53.7

System Fill‡ 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

Total Product Demand 101.6 101.9 100.3 99.4 99.8 100.5 99.5 100.9 101.2 100.5 101.1 100.7 102.1 102.5 101.6SupplyOpec Crude 29.7 29.4 29.3 31.3 31.6 30.2 29.8 29.6 29.5 29.8 28.9 29.0 29.1 28.9 29.0

Opec NGL/Cond. 5.1 5.3 5.2 5.3 5.3 5.3 5.2 5.1 5.2 5.2 5.3 5.3 5.2 5.2 5.2

Non-Opec 64.4 65.0 64.9 62.9 61.1 62.0 62.5 63.2 64.8 63.1 64.9 65.0 65.1 65.6 65.2

Processing Gain 2.1 2.2 2.3 2.4 2.4 2.3 2.3 2.2 2.2 2.2 2.2 2.3 2.3 2.2 2.3

Total 101.2 101.9 101.8 101.9 100.4 99.9 99.8 100.1 101.6 100.4 101.3 101.6 101.7 101.9 101.6Stock Change to Balance -0.3 +0.1 +1.5 +2.5 +0.6 -0.6 +0.3 -0.8 +0.4 -0.2 +0.2 +0.9 -0.4 -0.6 0.0Observed Chg. in Stocks* -0.2 +1.1 +0.7 +1.9 +0.8 +0.1 +1.6 -0.4 +0.5 +0.5

Missing Barrels† -0.1 -1.0 +0.8 +0.6 -0.2 -0.7 -1.3 -0.4 -0.1 -0.7

2019 2018 2014 2015 2016 2017 2018 2019 Refinery Inputs Oct Nov Dec Dec Year Year Year Year Q4 Year Q1 Q2 Q3 Q4 YearOECD-34 36.3 37.4 38.6 39.4 36.9 37.9 37.8 38.8 38.4 38.5 38.0 37.7 38.9 37.4 38.0

Non-OECD 44.1 44.8 45.0 44.6 41.3 41.9 42.4 42.8 44.1 44.0 44.7 44.1 44.6 44.6 44.5

Total Refinery Inputs 80.3 82.2 83.5 84.0 78.2 79.8 80.2 81.5 82.5 82.5 82.7 81.8 83.5 82.0 82.5

*Based on OMI’s global inventory levels (p6). †Defined as implied stock change minus observed stock change. ‡System fill is oil needed to fill up the supply system for crude and refined products, and strategic reserves. Source: Energy Intelligence

GLOBAL OIL BALANCE

NON-OPEC CRUDE OIL AND OTHER LIQUIDS 2019 Chg. 2018 2019(’000 b/d) Nov Dec M-o-M+/- Year TotalTotal Crude 51,148 51,287 139 48,072 49,323Americas 23,803 23,947 145 21,209 22,574United States 12,911 12,924 13 10,993 12,242

Canada 4,464 4,488 23 4,212 4,247

Mexico 1,704 1,724 20 1,813 1,681

Brazil 3,090 3,164 74 2,587 2,791

Europe 3,337 3,354 17 2,943 2,804North Sea 2,959 2,976 17 2,532 2,416

Norway 1,651 1,659 9 1,453 1,376

United Kingdom 1,215 1,217 2 949 1,087

Africa/Mideast 2,989 3,000 10 2,987 2,952Oman 872 864 -7 877 852

Egypt 645 650 4 618 631

Asia 21,020 20,987 -33 20,932 20,994

Russia 11,244 11,247 3 11,278 11,303

Kazakhstan 1,789 1,792 3 1,726 1,738

Azerbaijan 674 679 5 710 674

China 3,881 3,855 -26 3,784 3,886

Indonesia 731 727 -4 767 743

India 683 669 -14 709 683

Malaysia 610 607 -3 656 599

Total Other Fuels 13,719 13,572 -148 13,002 13,695Natural gas liquids 10,222 10,106 -117 9,439 9,971

Biofuels, other* 3,497 3,466 -31 3,563 3,725

Total Non-Opec 64,868 64,859 -9 61,073 63,099Total World 99,607 99,421 -186 97,475 97,585Refinery gains 2,232 2,267 35 2,367 2,286

Total 101,839 101,687 -151 99,842 99,833*Other includes gas-to-liquids, coal-to-liquids, refinery additives.

Source: IEA, EIA, Jodi, government and trade data, Energy Intelligence.


P3

N O N - O P E C S U P P LY

47.0

48.0

49.0

50.0

51.0

52.0

28.0

29.0

30.0

31.0

32.0

33.0

Dec '18 Mar '19 Jun '19 Sep '19 Dec '19

Non-Opec Output(Right Axis)

Opec Output

(million b/d)

Source: Energy Intelligence.

CRUDE OIL PRODUCTION


Relentless Output Growth Picks Up Speed in 2020Non-Opec oil producers continue to grab market share from Opec producers. Although preliminary December data show non-Opec finishing the year with a small drop of 35,000 barrels per day on the month, non-Opec ends 2019 with an average growth of 1.9 million b/d in supply versus 2018, when it added a majes-tic 3.1 million b/d. The start of 2020 is again stormy with a growth of 2.65 mil-ion b/d seen for the first half, and 2 million b/d in the third quarter before the growth drastically drops down to just 840,000 b/d in the fourth quarter — if indeed the US crude oil increase comes in as low as 700,000 b/d as Energy Intelligence now forecasts (OMI Dec.16’19).

All these additions are a solid buffer in case of a supply disruption in the Mideast, which analysts see as a possibility with the high tensions between the US and Iran (p4). If there is no such disruption, Opec would have to lower output to make room for non-Opec to support the oil price. Balances signal that Opec can produce 29 million b/d to keep the market in balance (p2).

Supply additions in the US — the key contributor to supply growth in 2020 with Guyana, Canada, Brazil and Norway — are not just light and sweet shale but also medium, sour oil from the Gulf of Mexico that topped 2 million b/d for the first time in December. US shale growth is starting to ease under cash-flow con-straints, very low natural gas prices, and some transport constraints. Although Canada is less of a presence in the global market as most of its exports end up in US refineries, its volumes are nearing 6 million b/d of overall oil production, which makes it the world’s fourth-largest producer after the US, Russia and Saudi Arabia.

In the North Sea, Norway’s massive Ural’s look-alike Johan Sverdrup started up in early October and has expanded rapidly to well over 300,000 b/d. It is set to reach 440,000 b/d by midyear. February loadings signal Sverdrup might already be very close as 19 verified cargoes represent a volume of 430,000 b/d. This pushes John Sverdrup just ahead of the UK Forties stream. Three other 2019 Norwegian start-ups, Trestakk, Utgard and Oda will be joined by at least four others in 2020. The UK is moving back over the 1 million b/d level in the second half of the year.

Other Atlantic Basin new barrels are Brazil’s Santos Basin pre-salt developments off Rio de Janeiro and Sao Paolo provinces. The country’s largest field Lula has just reached capacity on its latest floating storage and offloading (FPSO) vessel and has topped the 1 million b/d mark. Neighboring Buzios now has its FPSO actively hooking up pre-salt wells. Brazil’s expected growth in 2020 is second only to the US, roughly matching the Gulf of Mexico increase. Newbie Guyana goes from zero to over 100,000 b/d after the first quarter.

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Click here to see NON-OPEC data

DECEMBER 2019 OPEC AND NON-OPEC COMPLIANCE(‘000 b/d)Opec ‡ Base Pledge Dec ComplianceSaudi Arabia 10,633 322 9,800 833 259%Iraq 4,653 141 4,505 148 105UAE 3,168 96 3,040 128 133Kuwait 2,809 85 2,711 98 115Nigeria 1,828 53 1,638 190 358Angola 1,528 47 1,360 168 357Algeria 1,057 32 1,021 36 113Ecuador 531 16 543 -12 NACongo (Br) 325 10 343 -18 NAGabon 187 6 252 -65 NAEq Guinea 127 4 118 9 225Opec 11 26,846 812 25,331 1,515 187%Iran 3,296 0 2,110 0 NAVenezuela 1,171 0 679 0 NALibya 1114 0 1,197 0 NAOpec 14 32,427 29,319 1,515 187%

Non-Opec ‡ Base Pledge Dec ComplianceRussia 11,421 230 11,247 174 76%Mexico 2,017 40 1,948 69 171Kazakhstan 1,900 40 1,882 18 46Oman 995 25 970 25 99Azerbaijan 796 20 813 -17 NAMalaysia 653 15 702 -49 NABahrain 227 5 190 37 749South Sudan 132 3 129 3 97Brunei 135 3 121 14 466Sudan 74 2 74 0 NANon-Opec 10 18,350 383 18,076 274 72%Combined 24 50,777 1,195 47,395 1,789 150%In 1,000 b/d. ‡Volumes based on October 2018 secondary source production assess-

ment for Opec and production volumes for non-Opec alliance as reported by Opec,

except for Kuwait and Azerbaijan, based on September, and Kazakhstan, based on

November. Qatar left Opec Jan.1, 2019. Ecuador to leave Opec Jan.1, 2020. Opec com-

pliance based on crude oil only; non-Opec production includes natural gas liquids.

Source: Opec, government data, Jodi, Energy Intelligence.

OPEC CRUDE OIL PRODUCTION 2019 Chg 2019(’000 b/d) Nov Dec M-o-M Q3’19 Q419Saudi Arabia 9,890 9,800 -90 9,791 9,998 Iran‡ 2,110 2,110 0 2,208 2,127 Iraq 4,577 4,505 -72 4,675 4,550 Kuwait 2,706 2,711 +5 2,635 2,683 UAE 3,065 3,040 -25 3,068 3,058 Venezuela 697 679 -17 731 690 Nigeria‡ 1,682 1,638 -44 1,761 1,672 Libya 1,250 1,197 -53 1,123 1,223 Algeria 1,024 1,021 -3 1,025 1,023 Angola 1,278 1,360 +82 1,402 1,303 Ecuador 545 543 -2 547 518 Congo (Br) 298 343 +45 316 320 Equatorial Guinea 120 118 -2 118 118 Gabon 200 252 +52 199 212 Total Opec Crude 29,442 29,317 -124 29,598 29,495 Opec NGLs 5,154 5,096 -58 4,996 5,051 Opec Other Oil 143 149 +6 145 149 Total Opec 34,739 34,562 -177 34,740 34,694 ‡ Excludes offshore condensates. Source: government data, Jodi, Opec, Energy Intelligence.


P4P4

O P E C S U P P LY

Opec Output Slides, Must Drop Even More in 2020Opec’s 29.3 million barrel per day production in December was the second low-est for 2019, a harbinger of what is to come in 2020. For Opec to balance the market this year it would need to produce an average 29 million b/d. On the face of it, Opec is already pretty close to target. But with Brent well above $60, com-pliance to pledged cuts might be harder to achieve (p2). In addition, Opec’s bal-ancing act might get tougher since US production remains pretty strong and its growth might not slow as much as now expected (p3). Opec meets again in March (OMI Dec.16’19).

Saudi Arabia, as usual and as announced, delivered a crude oil production cut in December much deeper than pledged. It held back 833,000 b/d according to Energy Intelligence. Saudi Arabia itself reported to Opec a production of just below 9.6 million b/d for the month which would have taken its output cut to just over 1 million b/d. Additional help came from Kuwait and the United Arab Emirates as usual, and this time Iraq also contributed. Angola and Nigeria invol-untarily saw lower crude production. Saudi Arabia and Kuwait are starting up heavy oil production in their shared Neutral Zone after a five-year hiatus but will tighten taps elsewhere to limit their overall production levels.

In December and the first half of January, the world’s focus was on US and Iranian attacks taking the region to the brink of war, but mutual missile strikes did not hamper oil production. Regional analysts fear that Iraq might become the battlefield in the US-Iran dispute. In that case, production in southern Iraq might be especially impacted. In December, protests in the south forced lower production there. Basrah exports in December were the lowest since March. Foreign operators have started evacuating staff and the unrest is expected to mostly impact the longer-term presence and investments of US companies. Exxon Mobil had already pulled staff from the south in recent months and Chevron is pulling staff from the northern Kurdistan region.

Output disruptions in Libya could dramatically lower Opec production. Militant forces under the command of Gen. Khalifa Haftar fighting the UN-backed gov-ernment in Tripoli have closed major oil ports, effectively drying up most of the country’s 1.2 million b/d in production. The closure puts further pressure on effectively stalled peace talks between the two forces. Libya exports sweet oil, which can be replaced by other sweet producers, such as those in the North Sea, Caspian and West Africa. Further afield, US exports of light crude can benefit.

Opec is on track to meet the lower targets for the first quarter. Opec data will be somewhat distorted when data from January is discussed as Ecuador left the group at the start of the year. That means non-Opec supply is 550,000 b/d high-er while Opec is down the same volume. The data history and production fore-cast will be reflecting Ecuador outside Opec.

Click here to see OPEC data


P5P5

D E M A N D

Oil Demand Risk is Rearing Its Head AgainThe most recent batch of oil demand data for the fourth-quarter 2019 is weaker than expected and raises risk to the oil price if it keeps disappointing (OMI Dec.16’19). Growth rates at the end of last year and the first part of 2020 were supposed to bounce, partly as sluggish macroeconomic growth bottomed out, and also as oil demand looked better when compared to an anemic 2018. Data show demand growth isn’t crashing, but it isn’t reverting to its average of 1.2 million barrels per day, lifted by expectations for more economic growth and industrial activity this year.

Instead of bouncing, rates of demand expansion keep sagging, especially in developed economies, with new weakness showing up in the US, which was supposed to be more immune from the lethargy than other regions like Europe, Japan and South Korea.

Analysts can only see part of the picture, as official data for the US is only cur-rent through October. Weekly data since October suggest a rosier picture but can suffer downward revisions, which means that estimates for the fourth quarter (now long gone) might be overinflated. Once expected to grow by over 200,000 b/d in 2019, the US might post 50,000 b/d of growth after accounting for poten-tial revisions in November and December (p11).

Weakness in US demand has landed especially hard on diesel and lines up with data pointing to weaker industrial transportation and manufacturing last year. In addition to structural issues, demand also faces seasonal factors — a warm winter was partly responsible for extremely weak demand across the OECD in the fourth-quarter 2018 and this winter is turning warmer as well, impacting patterns and balances (p2).

Weaker demand is not only hitting developed economies. Indian demand growth bounced in November after falling earlier in the year but faded in December, landing essentially flat compared to last December. India and China are the two most important growth markets for oil, so their cycles of energy intensity are all the more important. Chinese demand contributed almost all the growth last year and is expected to grow again this year, albeit at a slightly slower pace.

The only region to see a significant bump in energy consumption at the end of 2019 was the Mideast, where Saudi Arabian energy demand surged (p10). The country burned 300,000 b/d more fuel oil and 200,000 b/d more crude in October. High-sulfur fuel oil displaced from the shipping industry is now extremely cheap and can be burned for power.

Looser monetary policy should drive more economic growth this year, boosted by more resolution on a US-Beijing trade deal. In turn, the world is expected to need more oil. This takes time and leaves more demand growth in the second half of 2020 than the first. It also leaves demand vulnerable to another round of downgrades later in 2020, which were a major source of downside risk in last year’s market, if there are any hiccups in macro recovery.

GLOBAL OIL DEMAND

(‘000 b/d) MoM YoY Q3'19 +/- 2019 +/-OECD Dec’19 +/- +/- Q3'18 2018*Americas 24,949 -958 -190 88 79

US 20,283 -449 -196 48 17

Canada 2,329 -279 -1 -8 42

Mexico 1,714 -142 12 37 14

Europe 13,601 -601 -6 -101 -114Germany 2,277 -117 61 48 24

France 1,581 -72 -6 34 -1

UK 1,492 -73 -66 -71 -40

Italy 1,218 4 16 -83 -90

Spain 1,324 -26 12 -8 1

Netherlands 853 24 -47 -86 -46

Asia 8,755 495 234 -110 -149Japan 4,278 426 51 -119 -122

South Korea 2,820 131 127 4 -28

Australia 1,212 -52 49 -6 -7

Total OECD 47,305 -1,064 39 -122 -183Non-OECD Asia 29,329 -760 603 756 979China 12,437 -634 383 692 530

India 5,220 -158 64 109 139

Indonesia 1,937 83 92 58 88

Taiwan 861 8 -77 -85 -46

Thailand 1,408 43 21 32 19

Russia 3,672 0 123 196 34Middle East 8,678 345 182 3 -11Saudi Arabia 3,194 -142 299 52 56

Iran 1,966 182 -121 -99 -85

Latin America 5,548 -25 -116 -285 -217Brazil 3,171 -19 -1 -15 -9

Venezuela 251 0 -134 -146 -132

Argentina 783 9 33 -78 -42

Africa 4,694 -130 34 124 140Egypt 677 -2 -24 -10 -32

South Africa 659 -12 -16 -60 -36

Europe 888 22 48 50 49Total Non-OECD 52,810 -548 876 845 973System Fill 150 150 150 150 150

World Demand 100,266 -1,612 915 672 739*Full year vs. previous year.

Source: IEA, EIA, Opec, Jodi, government data, Energy Intelligence.

GLOBAL PRODUCT DEMAND

2019 (‘000 b/d) Oct Nov Dec 2019 Chg. LPG 12,620 12,609 13,008 12,517 3.0%

Gasoline 26,021 25,797 25,720 25,878 0.6%

Jet Fuel/Kerosene 8,164 8,264 8,389 8,272 0.1%

Gas/Diesel Oil 28,778 29,101 28,024 28,127 0.6%

Fuel Oil 6,714 6,929 6,885 7,341 -5.3%

Other Products 17,933 17,779 16,766 18,258 2.8%

Total Products* 101,418 101,728 100,116 100,394 0.8%*Excludes system fill. Source: IEA, EIA, Opec, Jodi, government data, Energy Intelligence.

Click here to see DEMAND data


P6P6

I N V E N T O R I E S

Commercial Oil Stocks Set to Rise In First HalfA healthy fourth-quarter stockdraw in developed economies has left commercial oil inventories just 1% higher at the end of 2019 compared to year-end 2018, suggesting oil markets were pretty well balanced last year (p2). The pull on stocks eased in December, after a hefty upward revision for November, and early data in January suggests stocks are on the rise again (OMI Dec.16’19). Balances signal that more oil is flowing into tanks during the first half of 2020.

Globally, total oil inventories keep marching up — the world now has about one billion more barrels of oil in working inventories compared to five years ago. Of that, nearly 900 million barrels ended up in China. Almost all of this oil is crude. China’s expanding infrastructure requires higher inventories at new refineries, in ports and pipes. This crude oil is not flowing back to market as it is part of China’s buffer to deal with supply disruptions. China turned a net exporter of products in late 2019, which will show up in Asian product tanks (p10). In 2020 China plans to increase refinery runs and export more product.

OECD commercial oil stocks drained substantially throughout the second half, helping prices up. Had demand growth in these economies not collapsed last year, the amount of oil held to cover days of forward demand would be under 60 days, and falling toward the 55-57 days of forward cover, where Opec pro-duction decisions hold greater sway over prices. The December OECD stock increase was led by gasoline, which seasonally climbs through the end of January by an average 52 million bbl. This year is on course to hit that aver-age, but is running a little hot in the US where gasoline posted the biggest one-week gain since 2016 at the outset of January (p11).

OECD diesel stocks are climbing too, which is also not unusual during this time of year, but is ominous, since the new sulfur rules on shipping fuel were expected to weigh heavier. Some of the same pressure on product stocks is showing up in Asia, which had been running tighter last year (OMI Sep.16’19). Gasoline prices remain subdued in the region on the back of abundant sup-plies from new refineries in the region, large stocks and limited demand in winter, except in China where gasoline and jet demand increases with the Lunar New Year. Naphtha is also struggling, with several crackers in Northeast Asia lowering runs for the first time since 2008.

Shipbrokers estimate oil in transit ticked down slightly in December, leaving the number well below the same time last year, when these barrels flowed to on-land storage and limited draws during the first quarter. In strategic stocks, India has gradually lifted its reserves to 19.8 million bbl, leaving another 20 million bbl remaining before Phase 1 of the country’s current pro-gram is filled, which would leave it with about 10 days of import cover.

OBSERVED INVENTORIES*

(‘000 2019 MoM b/d)

(million bbl) Oct Nov Dec +/- Q4/Q3World Commercial 5,912 5,952 5,973 21 619 Crude 3,036 3,081 3,079 -2 1,109 Gasoline 619 641 662 22 368

Mid-Distillates 942 956 980 25 -111

Fuel Oil 314 319 310 -9 38

Total Products 2,876 2,870 2,894 23 -503

OECD Commercial 2,915 2,912 2,904 -8 -442 Crude 1,108 1,118 1,082 -36 28 Gasoline 362 378 395 17 280


Fuel Oil 121 121 117 -3 -43

Total Products 1,806 1,793 1,822 28 -470

Americas 1,547 1,536 1,535 -1 -238 Crude 604 605 580 -25 92 Gasoline 250 264 280 17 -121


Fuel Oil 36 37 36 -1 -6

Total Products 942 931 955 24 -330

Europe 973 980 985 5 -142 Crude 358 362 361 -1 -12 Gasoline 87 89 89 0 -5


Fuel Oil 65 65 64 -1 52

Total Products 615 618 624 6 -130

Asia 395 396 384 -12 -75 Crude 146 152 141 -10 -138 Gasoline 25 25 25 0 -19

Mid-Distillates 73 75 68 -6 15

Fuel Oil 20 19 17 -2 13

Total Products 249 244 242 -2 63

Non-OECD Commercial 2,997 3,040 3,069 29 1,061 Crude 1,927 1,963 1,997 34 1,081 Gasoline 258 263 267 4 88

Mid-Distillates 419 427 430 3 4

Fuel Oil 193 199 192 -6 81

Total Products 1,070 1,077 1,072 -5 -33

Oil At Sea 1,159 1,158 1,154 -4 -58 Oil In Transit 1,056 1,059 1,059 0 72

Floating Storage 103 99 95 -4 43

Strategic Reserves 1,824 1,820 1,823 4 … Crude 1,510 1,505 1,510 6 …

Products 314 315 313 -2 …

Total World† 8,895 8,929 8,950 21 525 Crude 5,315 5,353 5,354 1 1,040

Products 3,581 3,576 3,596 20 -528

Days Cover‡ Oct Nov Dec Chg. Q4'19OECD Commercial 61.2 61.2 61.0 -0.20 -0.6 Crude 23.3 23.5 22.7 -0.77 0.1

Products 37.9 37.7 38.2 0.57 -0.8

Gasoline 25.7 26.9 28.1 1.18 2.5

Mid-Distillates 28.9 29.2 30.0 0.84 -0.5

Non-OECD Commercial 56.1 56.9 57.5 0.68 1.8World Commercial 58.5 58.9 59.2 0.27 0.6

*End-of-month observed inventory count. †Commercial inventories exclude oil at sea; total

world includes oil at sea and strategic reserves. ‡Days of current cover against three-

month average of forward demand. Source: IEA, Jodi, EIA, Euroilstock, Japan Meti, China OGP,

Brazil ANP, Oil Movements, Energy Intelligence.

Click here to see INVENTORIES data

EnergyIntelligence WWW.ENERGYINTEL.COM OMI® JANUARY 2020EnergyIntelligence WWW.ENERGYINTEL.COM OMI® JANUARY 2020

P7

R E F I N I N G

Sweet bunkers, Rather Than Diesel, Boost MarginsThe global switch to low-sulfur bunkers for vessels favors very low-sulfur fuel oil (VLSFO) over marine gasoil, for now (p10). That outcome delivers two preliminary winners: refiners that can deliver VLSFO, which has a maximum 0.5% sulfur, and vessels with scrubbers that can still burn the now heavily discounted high-sulfur fuel oil (HSFO), which is up to 3.5% sulfur.

It was widely expected that diesel would show spiking margins with the transition to the sulfur rule under the International Maritime Organization

umbrella now under way since Jan. 1, as diesel is a component for both marine gasoil and VLSFO. Traders say margins for VLSFO are equal or higher than that of diesel. Fears that new fuel oil blends might be damaging to vessel engines have so far not borne out.

Tight low-sulfur fuel oil supply, largely due to logistical bottle-necks, have caused benchmark

Singapore VLSFO prices to spike to among the highest level among all major oil products. And this is pushing some refiners in South Korea, the Mideast and Southeast Asia to reduce their runs of their fluid catalytic cracking units (FCCs), which produces mainly gasoline but also gasoil. They are cutting back runs in order to redirect some of the FCC feedstock into VLSFO or the pool of components that can be blended to become VLSFO.

As a result, these relatively complex refineries are running a bit more like a simple topping unit, but not quite (OMI Nov.20’19). Asian refiners have been under considerable pressure from weak refining margins that have persisted in loss-making territory since last October, and redirecting flows could potentially help lift overall margins. Even though that should deliver less gasoline to market, refiners across the globe are suffering from low gasoline margins, ranging from $4 per barrel in Europe to $5/bbl in Singapore and $7/bbl in the US.

Calculating refinery margins for the full product slate is complicated as refin-ers have not yet settled on a methodology for how to make new bunkers (OMI Dec.16’19). Bunker demand might still change away from VLSFO, even though the blends are deemed reliable and the costs are recouped in higher freight rates. Vessels with scrubbers burning HSFO benefit from the higher freight rates and the lower HSFO costs.

Global crude throughput in 2019 was flat on 2018, Energy Intelligence data show. Global product demand in 2019 was up 800,000 b/d and global refined product stocks have fallen by 100,000 b/d. The balance of demand growth, 700,000 b/d, was in part met by natural gas liquids that bypass the tradition-al refining system and keep growing fast. Also, gross runs in refineries are rising. In the US, for example, refiners add cheap intermediate feedstock, replacing expensive sour crudes.

CRUDE OIL REFINERY RUNS

Utilization Rate 2019 2018 2019

Nov Dec Dec Nov DecOECD-34 37,425 38,553 39,434 82.6% 80.0%Americas 18,811 19,454 19,815 83.2 79.8

Europe 11,958 12,195 12,570 82.2 82.9

Asia Oceania 6,656 6,905 7,049 81.4 75.2

Non-OECD 44,750 44,993 44,595 80.2 78.9Asia 24,114 23,898 22,908 86.7 85.4

Middle East 7,411 7,804 8,216 80.9 80.1

Latin America 3,429 3,441 3,670 80.0 80.0

Former Soviet Union 7,095 7,172 7,200 79.0 79.0

Africa 2,103 2,081 2,003 61.4 59.9

Europe 598 598 598 80.0 80.0

Total World 82,175 83,546 84,029 81.2% 79.4%

Source: IEA, EIA, Jodi, government data, Energy Intelligence.

KEY CRUDE OIL REFINING MARGINSDec 30- Jan 6-

($/bbl) Oct Nov Dec Jan 3 Jan 10Gross Product Worth - Delivered Crude CostUS GULF COAST — Fluid Catalytic CrackingSaudi Arabia Lt.-33.3 62.46 59.79 61.63 64.66 62.26

Mars-29.6 60.44 57.50 59.54 62.73 60.29

Maya-21.2 43.48 37.72 39.99 42.78 39.46

ROTTERDAM Catalytic Cracking (CC)Saudi Arabia Lt.-33.3 61.52 61.08 63.20 65.79 65.15

Bonny Light-34.6 66.90 67.09 67.94 70.53 68.27

Brent Blend-37.9 64.68 64.84 65.88 68.15 66.29

Urals-31.5 62.54 62.22 63.53 65.81 64.53

SINGAPORE Hydrocracking (HYCRK)Saudi Arabia Lt.-33.3 62.18 60.85 63.30 66.27 66.74Bonny Light-34.6 69.92 70.50 72.57 74.39 73.45Oman-33.1 61.19 59.39 62.09 65.05 66.47Tapis Blend-45.5 69.08 69.68 71.93 73.87 72.92REFINING MARGINS - GPW VS DELIVERED CRUDE COSTUS GULF COAST Fluid Catalytic CrackingSaudi Arabia Lt.-33.3 3.72 -2.28 -3.57 -2.65 -4.54

Mars-29.6 5.76 -0.52 -1.22 -0.13 -2.06

Maya-21.2 -8.86 -14.90 -6.75 -6.63 -8.43

ROTTERDAM Catalytic CrackingSaudi Arabia Lt.-33.3 0.32 -0.90 -4.30 -2.25 -2.58

Bonny Light-34.6 2.55 -1.13 -5.22 -3.47 -5.55

Brent Blend-37.9 3.45 0.27 -3.16 -1.48 -3.05

Urals-31.5 4.43 -0.77 -0.90 1.32 -0.80

SINGAPORE HydrocrackingSaudi Arabia Lt.-33.3 -2.57 -6.49 -7.59 -7.44 -7.56

Bonny Light-34.6 6.25 2.40 0.49 0.50 -0.33

Oman-33.1 -1.96 -5.69 -5.99 -5.59 -4.73

Tapis Blend-45.5 5.75 3.39 1.31 1.76 -0.11

API gravity values used in Energy Intelligence refining model. (r) Revised. Calculations for

various complexity configurations are each optimized for processing a specifically named

crude in a typical refinery for a given region on an ‘incremental-cost’ basis; that is as an

indication of the marginal value of crudes for pricing purposes. GPW = Refining revenue

less incremental cost, including variable costs of catalysts, chemicals, water, and power.

Margins = GPW less delivered crude cost. Crude costs include freight to the region,

crude spot prices or, for Arab Light and Maya, formula prices. Source: Energy Intelligence.

-8

-4

0

+4

+8

+12

Jan Mar May Jul Sep Nov Jan

Mars USG FCCBrent NWE CC

2019 2020

($/bbl)

TRENDS FOR KEY REFINING MARGINS


Click here to see REFINING data


P8

C R U D E O I L

Strong Crude Feels Start of Refinery MaintenancePremiums for physical crude cargoes over benchmark futures contracts started flipping into discounts mid-January, after three strong months in which a tight prompt market and Mideast missile attacks kept especially Asian buyers on edge and keen to pay more just to ensure delivery of oil (OMI Dec.16’19). Dated Brent, the spot price for the benchmark, sagged below the prompt Brent future after hitting a premium of more than $2.50. That might change if a blockade of Libyan oil exports persists.

Lower crude demand from refinery maintenance is, as expected, depressing physical oil prices although demand for very low-sulfur bunker fuels remains high (p10). Global benchmark Brent is trading March, cargoes that will be arriv-ing in April and May, when the Asian refinery maintenance season gets under way. Balances signal that the second quarter will be heavily oversupplied before tightening up in the second half (p2).

The Brent price briefly jumped over $71 after the US killed Iranian Gen. Qassem Soleimani, but de-escalation since then brought Brent down below $65 before jumping back up on inconclusive peace talks in Libya. Still, this market has lim-ited upside because it has lots of oil lined up — just not in the prompt months (p3). But as long as Iran boils in the background, it cannot sell off and net-long positions remain high (p9).

Even without maintenance, crude throughput in the US has been going down. Refiners buy more unfinished and fuel oil, especially imported oils from Russia at a discount, to deal with the relative tightness of sour grades in the Atlantic Basin. The volumes add up. In October, the last month with full data, US refiners bought an additional 300,000 b/d in heavy oils from Russia (p7). This creates additional softness in the crude market.

In addition, some demand for refined products is met by rising volumes of natu-ral gas liquids, which bypass the traditional refinery system and reduce demand for crude oil. But Opec cuts and US sanctions keep this market relatively tight. The Brent one to six months futures curve where the prompt premium is trading around $3.50, a strong backwardated market. US benchmark West Texas Intermediate (WTI) saw its prompt premiums flip to discounts, to a contango price structure, but it remains tightly supplied in later months. The Nymex WTI one to six months spread is still showing a $1 premium.

The physical sweet market received an additional boost from the switch to very low-sulfur fuel oil (VLSFO) under the rules of the International Maritime Organization that went into effect Jan. 1. High prices for VLSFO and steep dis-counts for unwanted high-sulfur fuel oil made sweeter grades more attractive (OMI Nov.20’19). At the same time, sour grades are tight in Asia and command a premium over similar oil in the Atlantic Basin, which allowed for some arbi-trage. Producers deliver just enough sour oil to keep sophisticated refineries humming along. Saudi Arabia and Kuwait are restarting heavy oil production at the Neutral Zone (p4).

-$2

-$1

$0

$1

$2

$3

$4

Oct'19 Nov'19 Dec'19 Jan'20

Physical Brent Premium Fades

North Sea Brent minus front-month ICE Brent Futures

Source: Energy Intelligence

($/bbl)

PHYSICAL BRENT PREMIUM FADES

Source: Energy Intelligence

CRUDE OIL BENCHMARKS AND SPREADS

Spot Assessments 2019 Benchmarks ($/bbl) Oct Nov DecOpec Basket 59.93 62.94 66.43

BFOE dated 59.71 63.21 67.22

UK Brent 60.33 63.93 68.90

Forties 60.30 63.91 68.80

Norway Ekofisk 61.04 65.12 69.67

Oseberg 61.02 65.17 69.92

Russia Urals (NWE) 58.10 62.98 64.44

Oman 61.18 63.69 66.41

Dubai Fateh 59.37 61.99 64.89

US WTI (Cushing) 53.96 56.97 59.82

Houston 73.71 74.03 72.69

W. Texas Sour 53.74 57.61 59.70

Mars 54.58 57.92 60.65

Lt. Lousiana Sweet 56.87 61.25 63.26

US Midcon Bakken 52.86 55.71 59.15

US West ANS 63.24 65.57 67.61

Asia Oct Nov DecMalaysia Tapis 62.95 65.97 70.32

Viet Nam Bach Ho 63.65 66.98 70.95

Russia ESPO 66.23 68.80 71.23

MideastAbu Dhabi Murban 60.93 63.59 66.85

Qatar Marine 59.57 62.68 66.45

MediterraneanAlgeria Saharan 60.43 64.04 68.68

Azerbaijan Azeri 63.69 68.35 70.60

Kazakhstan CPC Blend

58.25 62.50 65.92

Russia Urals 58.90 63.97 67.00

AfricaAngola Cabinda 61.74 64.83 69.30

Girassol 62.18 65.97 70.12

Crude spreadsWTI-Brent* -5.75 -6.24 -7.40

Brent-LLS +2.85 +1.96 +3.96

Brent-Dubai +0.34 +1.22 +2.32

Murban-ESPO -5.30 -5.21 -4.38

Brent CFD +0.08 +0.56 +1.96

*Prompt month Brent versus same contract month WTI. Source: Opec, Thomson Reuters

crude prices, US postings and Energy Intelligence.

Click here to see CRUDE OIL data


P9P9

F I N A N C I A L M A R K E T S

Speculators Dump WTI, Iran Keeps Traders Tied to BrentThe week following the killing of Iranian Gen. Qassem Soleimani on Jan. 3 saw the biggest drop in speculative bets on higher oil prices on the US crude contract in over two years. During the same time, these same traders kept their positions in global oil prices tracked by the ICE Brent contract in London unchanged.

Mideast tensions lifted the US crude contract up toward $65, sparking a huge rush for producers to hedge output through futures and options and shore up the pro-duction outlook for 2020, where the US is expected to produce an incremental 700,000 barrels per day in crude — and now has upside, which cools off previous outlooks on oil balances in 2020 following already higher data for the fourth quar-ter (p3). Speculators were long across commodities through December on more upbeat expectations for global growth this year, with some warning that the enthusiasm had left oil overbought and susceptible to a price slide, should investors close out these positions (OMI Dec.16’19).

Oil’s spike on Jan. 3 created overnight profits for some, which were promptly closed out, especially for Nymex West Texas Intermediate (WTI). Given the US pro-duction outlook, many see price ceilings on oil at $70 Brent and $65 WTI. The next week saw US President Donald Trump de-escalate tensions with Iran. With oil prices at fresh highs, and no physical supply disruptions, investors in the WTI con-tract sold the equivalent of 50 million barrels of crude.

In Brent, these traders bought a little more oil. The immediate tension between the US and Iran has passed, but threatens to rear its head throughout the year, leaving exposure to Brent a good bet — apart from the profits on the monthly roll. The opposing flow of trade between WTI and Brent has helped open interest in the Brent contract tick up slightly, while participation in WTI (for Nymex and ICE combined) continues to trend down.

The fireworks in the Mideast and the price action in crude caught all the attention, but speculative sentiment has also turned sour on diesel, the product that would suffer most, should the global economic growth continue to slow (p11). After clos-ing out most of their long positions on diesel in New York and London, speculators were net long a miniscule 3 million bbl, the smallest since speculators shorted die-sel outright last October (OMI Nov.20’19).

Weakness in products, as well as mediocre economic data, cools expectations that the recent US-China trade deal will help propel oil higher this year. In Davos, Switzerland, the head of the International Monetary Fund (IMF) said growth would have been much weaker without a global loosening of monetary policy by many central banks. The IMF also continued easing expected growth rates for this year and next and said continued efforts would be needed to shore up the current fore-cast. Further disappointments in the macroeconomic outlook remain one of this year’s downside risks, as it will dampen growth prospects and lead to more pres-sure in risk assets, like oil.

50

55

60

65

70

M A M J J A S O N D J F

Contract Delivery Month

Brent Jan 10

($/bbl)

WTI Jan 10

Brent Dec 24

WTI Dec 24


WTI & BRENT FUTURES PRICE CURVES

SPECULATIVE POSITIONING FOR ICE BRENT/WTI AND NYMEX WTI

-800,000

-400,000

0

400,000

800,000

1,200,000

1,600,000

Jan '14 Dec '14 Nov '15 Oct '16 Sep '17 Aug '18 Jul '19

Speculative Shorts Speculative Longs Net Speculative Length

(Contracts)


-180,000-150,000-120,000-90,000-60,000-30,000

030,00060,00090,000

120,000150,000

Jan '15 Sep '15 May '16 Jan '17 Sep '17 May '18 Jan '19 Sep '19

Managed money, gross long ICE Nymex diesel positionsManaged money, gross short ICE Nymex diesel positionsNet Speculative Length

SPECULATIVE ICE GASOIL/NYMEX DIESEL POSITIONS


$51

$54

$57

$60

$63

$66

$69

$72

$75

$78

2,500

2,600

2,700

2,800

2,900

3,000

3,100

3,200

3,300

3,400

Jan'15 Mar'15 May'15 Jul'15 Sep'15 Nov'15 Jan'15

Oil Versus Equities

S&P 500 Brent

(S&P 500 Index) ($/bbl)

Source: Energy Intelligence, Reuters, ICE

OIL VERSUS EQUITIES

Source: Energy Intelligence, Reuters, ICE

Click here to see FINANCIAL MARKETS data


P10P10

A S I A

Shippers Love Low-Sulfur Fuel Oil, And Pay UpShipping fuel, once dirty and cheap compared to other refined products, is now an oil product in its own right and the most expensive of all in the Singapore market. Refiners in the Mideast and Southeast Asia are following the profits for very-low-sulfur fuel oil (VLSFO) and straining to supply enough barrels at the expense of other products, like gasoline, where profits are struggling (OMI Dec.16’19). They can accommodate this swing by dialing back capacity in their fluid catalytic cracking units, which make mostly gasoline, and instead send the feedstock into the shipping fuel pool (p7).

From January, all ships must burn low-sulfur 0.5% fuel or have scrubbers to clean 3.5% high-sulfur fuel oil (HSFO). Singapore is the largest shipping fuel market in the world, supplying about 900,000 barrels per day, with some two-thirds expected to transition to the lower-sulfur grade.

In addition to the transition, Singapore VLSFO is tight due to supply logistics into and out of refueling stations, where barges deliver fuel. The barges are segregated by the different viscosities of various bunker blends as well as potential issues from commingling different batches of VLSFO. Certain specifications of VLSFO cannot be mixed in the same tank as sludging might occur, fouling ship engines. Some barges carry only certain specifications of VLSFO.

At the same time, traditional HSFO demand has been falling since around August, when it accounted for close to 90% of total bunker sales in Singapore. By November, this market share had fallen to just over 40%, data from the country’s maritime and port authority show. It is unclear how much surplus 3.5% shipping fuel is being absorbed into power generation. But there has been a significant decline in fuel oil exports from Middle Eastern countries like Saudi Arabia and Iraq, oil analytics firm Vortexa’s Serena Huang said, suggesting some volumes may have gone to power generation or storage. Exports from Europe have dried up (OMI Oct.15’19).

While VLSFO supply is tight, the Asian products market is bracing for a fresh wave of Chinese exports (OMI Nov.20’19). The country flipped to become a net product exporter last year on average, which will pick up pace this year with new capacity ramping up. China is set to flood the Asia-Pacific markets with more exports this year of gasoline, kerosene, gasoil and even potentially VLSFO (p12). Its Ministry of Commerce’s first batch of export quotas for 2020 stands 30% higher than a year ago, at 28 million tons.

Speculation is mounting that giant private refiners 400,000 b/d Hengli Petrochemicals and Zhejiang Petrochemicals could be allowed to export products this year too, which could encourage them to ramp up their output, and further distress the markets. State-owned China National Petroleum Corp. (CNPC) research expects Chinese products exports to rise to 64 million tons this year — up from an estimated 54.5 million tons in 2019. CNPC sees gasoil as accounting for 40% of China’s 2020 oil products exports, with gasoline following at 36.7% and kerosene at 23.3%.

SINGAPORE SPOT PRICES

30

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60

70

80

90


($/bbl)

Naphtha

Diesel

Fuel Oil (180 cst.)

Source: Reuters

MAIN PRODUCT DEMAND Q1’20

(‘000 b/d) LPG Gasoline Jet+Kero Gasoil Fuel OilChina 1,918 2,960 832 3,080 456

India 914 706 323 1,762 164

Japan 451 830 676 849 278

South Korea 381 225 233 472 139

Taiwan 69 160 14 100 57

Total Asia 4,770 7,110 3,375 9,516 3,129

Source: IEA, Jodi, Government reports, Energy Intelligence.

MAIN PRODUCT DEMAND GROWTH Q1’20/Q1’19

(‘000 b/d) LPG Gasoline Jet+Kero Gasoil Fuel OilChina 74 -121 12 95 -95

India 38 17 -32 -14 -7

Japan -20 21 -10 33 21

South Korea 82 -1 -2 -35 -60

Taiwan 8 -2 0 9 -13

Total Asia 182 3 -35 318 -402


REFINERY RUNS IN KEY ASIAN MARKETS

2019 Q4’19/Q4’18(‘000 b/d) Oct Nov Dec Utilz. Runs+/-China 13,674 13,758 13,439 87% 1187

India 5,212 5,157 5,179 101% 55

Japan 2,781 3,045 3,190 76% 13

South Korea 2,643 2,887 2,977 89% -247

Thailand 765 780 922 95% -337

Indonesia 655 681 736 72% -197

Taiwan 717 798 829 60% -82

Other 3,454 3,664 3,531 85% 123

Total 29,901 30,770 30,803 85% 515Source: IEA, Jodi, Government reports, Energy Intelligence.

Click here to see ASIA data


P11P11

A M E R I C A S

Looser Product Market, Soft Margins Set New TrendProduct markets in the Americas have not only weathered potential regulatory disruptions, but have loosened further as 2020 gets under way. Inventories are rising fast, especially for gasoline. Three weeks into 2020 is not a trend but domestic demand is tepid, especially for diesel, while exports of refined products are keeping up. That trend looks set to continue over the near term. Crack spreads are falling despite lower outright refinery utilization (p7). In addition, unusual weather patterns are robbing key products of their seasonal uplift (p5).

Sagging crack spreads for products like gasoline are typical this time of year, but the scale and uniformity of declines go beyond seasonal expectations. Gasoline’s crack against an incremental barrel of medium, sour Mars crude is $8 in January, a continuation of low December. The poor performance comes despite the full implementation of Tier 3 sulfur restrictions, which as recently as November were a concern especially along the US East Coast (OMI Nov.20’19).

Traders say the main issues are a lack of demand growth and rising export opportunity. Despite spring-like weather across large swaths of North America, consumers are not spending more money on fuel, and that is showing up not only in cracks but also in inventories, which have swollen in the US to 2.7 million barrels higher than the same time in 2019. And throughout the Americas gasoline inventories were lower-end 2019 than the year before, yet days of forward demand cover was higher. US demand for the road fuel is down nearly 2% at the start of 2020 compared to the same period in 2019. The Nymex futures forward curve is in contango — with the prompt discount signaling ample supply.

Diesel is supposed to see strength in part from heating demand this time of year. Diesel was expected to also benefit from low-sulfur bunker fuel rules from the International Maritime Organization (OMI May17’19), but neither the seasonality, the weather, nor the regulations have provided any sustained uplift for diesel. Shippers prefer very-low-sulfur fuel oil, which is absorbing less diesel as a blend than expected. Cracks are retreating from end-2019 and the forward curve for the benchmark Nymex futures contract is virtually flat.

Concerns about the health of diesel demand in the Americas are also visible in financial positions. Bets on higher diesel prices are rapidly declining, while bets on falling prices are rising. Risk capital is neutral on diesel futures on the Nymex. Heating oil continues to switch to cheaper natural gas, and the impact in winter is visible.

Balances could get looser and flows could be further reconfigured in the coming months as refining capacity is added in the Caribbean. The Philadelphia Energy Solutions refinery is still set to close. That renders the region more reliant on imported gasoline and diesel. Those volumes could come from Europe or to a smaller degree from the Lime Tree Bay refinery, originally the Hovensa plant on St. Croix in the Caribbean.

US GULF COAST SPOT PRICES


(‘000 b/d) LPG Gasoline Jet+Kero Gasoil Fuel OilUS 3,643 8,896 1,711 4,189 244

Canada 454 819 189 533 80

Brazil 208 1,246 130 900 21

Mexico 411 727 80 382 141

Argentina 5 186 59 258 31

Other Latin America 106 196 76 459 85

Total Americas 4,933 12,344 2,332 7,191 753

REFINERY RUNS IN KEY AMERICAS MARKETS

2019 Q4’19/Q4’18(‘000 b/d) Oct Nov Dec Utilz. Runs+/-US 15,681 16,263 16,868 87% -718

Canada 1,617 1,759 1,790 88% 37

Brazil 1,616 1,756 1,751 71% -10

Mexico 539 585 576 37% 2

Venezuela 200 200 200 16% -161

Argentina 480 475 482 76% 9

Ecuador 126 137 136 76% -16

Total Americas 21,312 22,241 22,895 76% -857



(‘000 b/d) LPG Gasoline Jet+Kero Gasoil Fuel OilUS 161 -64 48 -90 -29

Canada 34 -31 33 -24 6

Brazil -7 69 2 -31 -17

Mexico -5 -9 -4 4 0

Argentina -6 6 -2 3 2

Other Latin America -11 4 4 1 -8

Total Americas 156 -99 81 -161 -54

30

40

50

60

70

80

90


($/bbl)

Regular Unleaded

Diesel

3% Fuel Oil

Source: Reuters

Click here to see AMERICAS data


P12P12

E U R O P E

Bunker Sulfurs, Mideast Missiles Spook Europe Europe’s product traders are juggling the impact of new International Maritime Organization (IMO) rules on bunker fuel with heightened tensions in the Middle East, which supplies most of Europe’s critical jet fuel imports and some diesel.

Europe relies on jet imports to meet more than a third of its still growing air-line fuel demand with more than half of all those tankers passing through the 21 mile wide Strait of Hormuz between Iran and Oman, which traders fear could become a target in any regional conflict. Traders tell Energy Intelligence it is impossible to plan for a blockade, but most seem happier holding fuel than selling it. Flights between Europe and Asia are being rerouted to avoid Iranian airspace after the accidental downing of a Ukrainian passenger jet leaving Tehran airport, adding up to an hour to flight times and significantly boosting regional fuel use.

European diesel margins came under some unexpected New Year pressure as shippers opted for very-low-sulfur fuel oil (VLSFO) rather than marine gasoil (MGO) to meet new IMO low-sulfur bunker rules (OMI Nov.20’19). Also, sluggish global economic growth and high Chinese exports freed up more Asian produc-tion, despite high tanker rates (OMI Dec.16’19). Europe is inundated with diesel imports with East of Suez arrivals set to hit 2.6 million metric tons in January, its highest since last June, according to data from tanker tracker Refinitiv.

Mainstay short-haul Russian flows are also booming with loadings at the main Baltic port of Primorsk and are set to hit a record 1.6 million tons in January, up 27% on December volume. Closely watched gasoil tanks in Amsterdam-Rotterdam-Antwerp stood 26% above year-earlier levels on Jan. 9, according to Insights Global. French strikes have failed to boost prices despite refinery block-ades resulting in localized fuel shortages. Refinery diesel margins briefly nudged $18 per barrel at the end of last year but are now below $13/bbl, according to Energy Intelligence data.

European gasoline exports have been hard hit by rising inventories in the target US market. Gasoline margins over Brent crude are at their lowest in 14 months having collapsed by half since late November. Mid-January saw the biggest jump in US gasoline stocks in four years, propelling inventories to their highest level in nine months and eliminating the need for European imports. Traders have shift-ed their focus to the Middle East instead where heavy refinery maintenance is expected to cause fuel shortages in the first quarter. At least two 60,000 ton extra tankers were fixed from Northwest Europe to the Mideast ahead of shutdowns at Saudi Aramco’s Jubail and Yanbu plants and Abu Dhabi National Oil Co.’s giant Ruwais complex (p7).

All eyes were on 0.5% VLSFO. Traders are keen to build export cargoes after VLSFO prices spiked above marine gasoil in Singapore mid-January (p10). The new IMO 2020 market is exceptionally volatile with VLSFO hitting a $323.25 per ton premium to high-sulfur fuel oil in Europe just after the Jan. 1, 2020 switcho-ver before sliding down to $263/ton (OMI Dec.16’19).

NW EUROPE SPOT PRICES


Jet+ Fuel(‘000 b/d) LPG Naphtha* Gasoline Kero Gasoil OilGermany 6 -34 12 0 92 -21

France 1 -20 0 1 -62 2

UK -27 5 -11 14 -44 -2

Italy -4 37 22 14 8 2

Spain 6 3 12 0 47 -38

Netherlands 3 -85 5 0 21 -13

Turkey -4 1 1 1 -21 -1

Total Europe -57 -108 45 47 25 -86



Jet+ Fuel(‘000 b/d) LPG Naphtha* Gasoline Kero Gasoil OilGermany 124 294 484 198 1179 43

France 148 116 180 161 881 52

UK 115 27 277 342 585 20

Italy 88 114 160 94 516 64

Spain 98 34 129 126 702 118

Netherlands 66 103 105 76 209 150

Turkey 114 54 50 93 407 22

Total Europe 1,130 1,027 2,026 1,446 6,787 951 Source: IEA, Jodi, Government reports, Energy Intelligence. *Naphtha detail only available for

OECD.

REFINERY RUNS IN KEY EUROPEAN MARKETS

2019 Q4’19/Q4’18(‘000 b/d) Oct Nov Dec Utilz. Runs+/-Germany 1,847 1,875 1,938 84% 235

France 829 823 787 54% -333

UK 1,123 1,101 1,125 73% -20

Italy 1,347 1,425 1,436 66% 54

Spain 1,348 1,334 1,331 88% -46

Netherlands 1,190 1,240 1,284 93% 181

Non-OECD 598 598 598 80% 0

Total Europe 12,662 12,555 12,792 83% -90


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Premium

Gasoil

3.5% Fuel Oil

Source: Reuters

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