Analys

What is behind the recent fall in US crude oil stocks?

Publicerat

10 år sedan

den

8 oktober, 2013

US crude oil stocks have fallen significantly during the summer months. This was mainly attributable to an increase in crude oil processing. In this way US refineries reacted to robust demand for middle distillates, which is reflected in low US distillate stocks and record US distillate exports. As crude oil processing declines, US crude oil stocks will likely rise again in the fourth quarter. Robust US distillate exports are exerting pressure on refinery margins in Europe, which will probably increase Europe’s dependency on imports of oil products.

US crude oil stocks have fallen significantly during the summer months. Since the end of June they have declined by 38m barrels and in mid-September reached their lowest level for 18 months. Destocking has been concentrated on two regions: in the Midwest (PADD 2) stocks have fallen by more than 20m barrels, and on the US Gulf Coast (PADD 3) by more than 14m barrels (chart 1). The lion’s share of the destocking in the Midwest related to the storage hub in Cushing, where stocks have fallen by a total of 16.5m barrels for 13 weeks in succession. What is the reason for this surprising trend and will the destocking continue?

The trend in stock levels can be divided into three sub-components: on the supply side are US oil production and US oil imports, and on the demand side, crude oil processing by refineries. US oil production has increased until recently. In mid-September it reached its highest level since May 1989 of more than 7.4m barrels per day. This component cannot therefore explain the destocking of recent weeks. On the other hand, imports of crude oil have fallen sharply. In the summer months they were, on average, 1m barrels per day lower than in the previous year. However, this will not be sufficient to balance out the simultaneous increase in US oil production. Between the end of June and mid-September this was, on average, 1.4m barrels per day above the previous year’s level. The trend on the supply side would therefore have been an indication of stockbuilding. The main reason for the significant destocking this summer is therefore to be found on the demand side, i.e. from the higher volumes of crude oil processed at refineries.

Crude oil processing in the USA was higher than usual this summer

US refineries stepped up crude oil processing much more significantly than usual this summer. Between the end of June and mid-September, an average of 16m barrels of crude oil was processed daily. This was 600,000 barrels per day more than in the corresponding period last year, and 900,000 barrels per day more than the long-term average level (chart 2). At the beginning of July, more crude oil was processed than at any time in the last eight years. It was also striking that refineries maintained processing rates at their high levels of July and August up to mid-September. Normally, refineries scale back their utilisation from the end of August as the summer driving season approaches an end. Refineries usually use the time in early autumn to carry out maintenance and to switch operations to the winter season. Hence, significantly more crude oil has been processed this summer than would otherwise be normal at this time of the year. This has only been possible by consistently dipping into crude oil stocks, although more crude oil has also been available as a result of the increased level of domestic oil production.

This cannot be explained with trends in the US gasoline market…

The fact that US refineries have increased their crude oil processing so strongly over an extended period this summer cannot be explained by trends in the US gasoline market, which is normally the most important driver of refinery activity in the summer months. Demand for gasoline in the US during the summer driving season showed virtually no increase compared to last year. US gasoline stocks have remained consistently 5 to 6 per cent above their long-term average for weeks with a few exceptions. US gasoline production was just slightly higher this summer than in the previous years. Moreover, the US exported less gasoline between March and July than one year ago, according to the EIA.

…but is attributable to distillate production in particular

The reason for the unusually high level of refinery activity over a prolonged period is above all attributable to middle distillates. US refineries have significantly increased the production of middle distillates in particular. This increased to an average of 5m barrels per day in the summer months, which was 13% higher than average for the last five years. More than half of the increase in crude oil processing this summer is therefore attributable to the middle distillates segment. The varying trend in processing margins is likely to have played a part here. While margins for gasoline production have fallen to the lowest level since end of 2011, they are still relatively high for middle distillates (chart 3). The fact that margins for middle distillates have held up much better is attributable to low US distillate stocks, which have remained well below their long-term average levels despite robust production of middle distillates.

Strong demand for distillates in and outside the USA

This is mainly the result of higher domestic demand and robust demand for distillates from abroad. Distillate demand from US consumers was 10% higher than last year during the summer months and 6% above the average of the last five years. Moreover, the USA exported 1.276m barrels of middle distillates per day on balance in July after having reached a level nearly as high in June (chart 4, page 3). Daily net distillate exports were almost twice as high in June and July as in the first four months of the year and also 26% above the same period last year. Weekly estimates from the US Energy Information Administration also indicate that distillate exports remained at a similarly high level in August and September.

Refinery activity is unlikely to sustain these exceptionally high levels

US refineries have benefited from cheaper crude oil from the country’s interior until recently, which, thanks to new pipeline capacity, can be transported to the US Gulf Coast, where roughly half of US refinery capacity is situated. This also enables US refineries to avoid the continuing restrictions on crude oil exports from the USA, since these restrictions do not apply to the export of oil products. Despite everything, US refineries are unlikely to maintain their distinctly high levels of crude oil processing of recent months, given lower margins. The EIA expects average crude oil processing of 15.3m barrels per day in the fourth quarter. This would still be more than 500,000 barrels per day above the average of the last five years, but some 600,000 barrels per day less than in the third quarter. The lower demand for crude oil from refineries indicates higher stock levels, if US oil imports are not being reduced markedly, as US oil production is likely to increase further as a result of the surge in shale oil production in North Dakota and Texas. In fact, the decline in US crude oil stocks seems to have come to an end. In the second half of September stocks were already increasing by roughly 8m barrels, due to lower volume of crude oil processing and higher oil imports.

Decline in crude oil stocks has recently also slowed at Cushing

The 13-week long decline in crude oil stocks at Cushing has also weakened visibly in recent weeks (chart 5). Whereas, between the beginning of July and the end of August, on balance an average of 1.36m barrels of crude oil per week were drained off Cushing, in September the figure had fallen to an average of less than 500,000 barrels per week. At the end of September, the decline in stocks at Cushing had almost come to an end. Should stocks be built up also at Cushing in the weeks ahead, this would not be attributable to a lack of transport or processing capacities. These are now sufficient – as the steady fall in Cushing stocks over the summer months despite rising shale oil production in the Midwest demonstrated. In fact, once the Southern leg of the Keystone XL pipeline is completed, additional transport capacities of 700,000 barrels per day will be available by year-end. A stock build-up would instead be attributable to lower crude oil processing at refineries. This should exert pressure on the WTI price in particular.

Record US distillate exports creating problems for refineries in Europe

What are the implications of these trends for Europe? According to data from the EIA, the USA was already exporting record volumes of middle distillates to Europe in May and June. Based on shipping data, this trend has continued in September. The high levels of US distillate exports will exert pressure on refinery margins in Europe. Despite low gasoil stocks, the price differential between gasoil and Brent oil has been moving in a narrow range around USD 15 per barrel for some months, which is hardly sufficient to offset the very low margins in gasoline production. The situation has been compounded by the fact that the USA itself has now become a net gasoline exporter. As a result the US market – formerly the most important sales market for European refineries – has been lost. At the same time, the USA is also competing in gasoline on other sales markets such as South America, for instance. Further refinery closures in Europe are thus on the cards, which would further increase Europe’s dependency on imports of oil products.

Relaterade ämnen:commerzbank research

Nästa

Kakao köpvärd i nuläget

Missa inte

Modity om elpriset vecka 41 2013

Fortsätt läsa

Annons

Klicka för att kommentera

Skriv ett svar
Avbryt svar

Analys

The cuts are for real and are already bullishly impacting the market

Publicerat

4 dagar sedan

den

5 december, 2023

Redaktionen

Thumbs down was first reaction by financial market. The market gave the decision from the latest OPEC+ meeting an unexpectedly bearish reception. Yes, it was an unusual type of decision as well as the form of the communication. It was individual, ’voluntary’ cuts rather than a wide OPEC+ based decision with cuts divided pro-rate across the group. The communication of these cuts were not done by the OPEC secretariat as is usual but rather by the individual energy ministers who committed to cuts. All this gave the decision an airy feel with the sense that ’voluntary’ meant kind of ’maybe’ instead of real commitments. Further that the group is no longer tied properly together with no solid unanimous decision. It all summed up to ’thumbs down’ by the financial market and the price fell.

Bjarne Schieldrop, Chief analyst commodities at SEB — Bjarne Schieldrop, Chief analyst commodities, SEB

The cuts are real and ’voluntary’ doesn’t mean ’maybe’. These ’voluntary’ committed cuts are no less firm commitments and no less real than the current voluntary cut by Saudi Arabia which continues to hold its production at 9.0 m b/d vs a normal 10 m b/d. These are real cuts: Russia -200 k b/d, Iraq: 223 k b/d, UAE 163 k b/d, Kuwait 135 k b/d, Kazakhstan 82 k b/d, Algeria 51 k b/d and Oman 42 k b/d. Total 896 k b/d. Compliance is of course always an issue. But broadly we expect these cuts to be delivered.

US oil inventories may continue to show marginal, bearish tendencies in December. These cuts will kick in from January 2024 and as such they will not impact oil inventories before then. So weekly US oil inventory data can continue to deliver marginally bearish data points through December along a trend for a while now where we have seen that total commercial crude and product stocks inches closer and closer towards the 2015-19 seasonal average.

The new cuts by OPEC+ is already physically impacting the market with tighter availability of crude cargoes for January programs. But that doesn’t mean that the new committed cuts by OPEC+ from January 2024 isn’t already impacting the physical oil market and oil prices. They are. Sales of physical oil cargoes by OPEC+ for January crude shipment programs are already in full swing. Refineries around the world are already now in the process of purchasing physical crude cargoes for Q1-24. Offerings of crude cargoes for Q1-24 by OPEC+ were immediately reduced the moment OPEC+ decided to reduce supply by 900 k b/d from January onward. Forward physical crude buyers are thus already experiencing a tighter supply in their forward purchases. And as such oil prices are already impacted.

Cuts are a backstop against deteriorating crude prices sub-USD 80/b and not a recipe for USD 100/b. The fresh 900 k b/d cut is not a recipe to drive the oil price to USD 100/b. In our eyes it is more of an effort to prevent the oil price from deteriorating further below USD 80/b. It is a backstop. And as such we think it is probably a sufficient backstop.

The bottoming of the global manufacturing cycle will be the ’big, fat cigar’ for OPEC+. It is pointless for OPEC+ to try to drive the oil price to USD 100/b without a solid tailwind from an accelerating global economy. Their best option is to try to stabilize the oil price around USD 80/b and then savor the joyride once the global economic cycle bottoms out and starts to accelerate. Long positions in oil will then rise rapidly and physical demand (oil demand growth) will accelerate. Both underpinning oil prices. OPEC+ can then lean back and smoke a big, fat cigar! The big, big question is of course when that will happen? Will we first have an ugly, economic setback in 2024/25 due to the strong rise in interest rates over the past 1-2 years? Or will inflation evaporate completely over the coming quarters because it is a complete creation of the exceptional Covid-19 events which are now reversing back towards normal? Financial markets are struggling to decide which one of these it will be. Ugly trough before global acceleration of global acceleration right away if inflation evaporates completely?

A macro economist I worked with during the global financial crises argued strongly then that the first sign of bottoming and acceleration would be found by looking at the manufacturing PMI of South Korea since they produce a swath of industrial sub-components which the global industrial engine needs. Much has changed since 2008/09 and true or false I don’t know as I’m not a macro economist. But here it is:

Manufacturing PMIs. South Korea has bottomed and lifted to the 50-line

Fortsätt läsa

Analys

SEB Metals price forecast update

Publicerat

1 vecka sedan

den

30 november, 2023

Redaktionen

Softer economic growth in 2024 calls for somewhat softer metals prices in 2024. Industrial metals prices as well as other commodity prices exploded during Covid-19 as governments around the world unleashed stimuli in the magnitude of 10x of what was done during the global financial crisis in 2008/09. Consumers shifting spending from services to consumer goods added to the boom. Bloomberg’s industrial metals price index was up 91% in March 2022 versus January 2020 because of this. Global manufacturing PMI peaked in May 2021 and has been fading since and below the 50-line from September 2022 with latest reading at 48.8. Industrial metals prices have faded since their peak in March 2022 but are still 30% higher than they were in January 2020. Even zinc, the worst performing metal, is still 9% above where it was in January 2020. As such one could possibly argue that industrial metals have not yet fully faded from their Covid-19 stimulus boom. One possible explanation could be inflation where US inflation is up 19% over the period. But this still leaves industrial metals up 11% in real terms. Another possible explanation is the big jump in energy prices over the period. While coal and gas prices have fallen back a lot, they are still quite high. The coal price in western Europe is 110% above where it was at the start 2020 and 50% above its 2010-2019 average. Most industrial metals are highly energy intensive to produce with digging and crushing of rocks, smelting, and refining of ore. The current aluminium price of USD 2215/ton is for example well aligned with coal prices. In addition to this there has also been significant closures of zinc and aluminium smelting capacity in Europe which probably have supported prices for these metals.

Global economic growth is forecasted to slow from 3.5% in 2022, to 3.0% in 2023 and then again to 2.9% in 2024 as the big jump in interest rates induce economic pain with a lag. Aligned with this we expect lower industrial metals prices in 2024 than in 2023 though only marginally lower for most of the metals. But the field of metals is wide, and the price action is thus adverse. Copper is likely the metal with the most strained supply and with huge needs in the global energy transition.

Aluminium: Prices will likely be depressed versus marginal costs in 2024. Aluminium from Russia is flowing unhindered to the market. Most is going to China for reprocessing and potentially re-exported while some is going to Turkey and Italy. It is all flowing into the global pool of aluminium and as such impacting the global market balance. The LME 3mth aluminium price is currently well aligned with coal prices and both have traded mostly sideways since June this year. Aluminium premiums in the EU have however fallen 30-40% since mid-June in a sign of weakness there. The global market will likely run a surplus in 2024 with depressed prices versus the marginal cost of production.

Copper: Softer fundamentals in 2024 but with accelerating tightness on the horizon. Copper is currently trading at USD 8470/ton and close to 37% above its early Jan 2020 level. The market is expected to run a slight surplus in 2024 followed by accelerating tightness the following years. Downside price risk for 2024 is thus warranted along with softer global growth. The power of Unions is however getting stronger in Latin America with demands for higher salaries. Strikes have broken out in Peru with production at the Las Bambas copper mine at only 20%. Further strikes and disruptions could quickly put the market into deficit also in 2024.

Nickel: Indonesia pursuing market share over price pushing the price down the cost curve. Indonesia’s nickel production is growing rapidly. Its production reached 1.6 million ton in 2022 (+54% YoY) and accounted for close to 50% of total global supply in 2022. Its share looks set to reach 70% by 2030. Lower prices will stimulate demand and will also force higher cost producers to shut down thus making room for the wave of new supply from Indonesia. Prices will be sluggis the nearest years as Indonesia aims for market share over price.

Zinc: Price has stabilized around USD 2500/t. Weakness in global construction will drive prices lower at times in 2024. The 3mth LME zinc price has fallen from a peak of USD 4499/ton in April 2022 to only USD 2248/ton in May 2023. Since then, it has recovered steadily to USD 2500/ton. Demand could struggle in 2024 as construction globally will likely struggle with high interest rates. But mine closures is a natural counter effect of low prices and will put a floor under prices.

Price outlook

Bjarne Schieldrop
Cheif Commodities Analyst
SEB Commodity Research

Fortsätt läsa

Analys

Now it’s up to OPEC+

Publicerat

3 veckor sedan

den

20 november, 2023

Redaktionen

All eyes are now back at OPEC+ after the recent fall in oil prices along with weakening crude curve structures and weakening economic statistics. OPEC+ will have to step up the game and give solid guidance of what it intends to do in 2024. If Saudi Arabia is to carry the burden alone (with only a little help from Russia) it will likely need to keep its production at around 9.0 m b/d on average for 2024 and drop it down towards 8.5 m b/d in Q1-24. This may be too much to ask from Saudi Arabia and it may demand some of the other OPEC members to step up and join in on the task to regulate the market in 2024. More specifically this means Iraq, Kuwait and UAE. The oil market will likely be quite nervous until a firm message from Saudi/Russia/OPEC+ is delivered to the market some time in December.

Saudi Arabia may get some help from President Joe Biden though as his energy secretary adviser, Amos Hochstein, has stated that the US will enforce sanctions on Iran on more than 1 m b/d.

Brent crude fell 4.6% ydy to USD 77.4/b and over the last three trading sessions it has lost USD 5.1/b. This morning it is trading only marginally higher at USD 77.6/b which is no vote of confidence. A good dose of rebound this morning would have been a signal that the sell-off yesterday possibly was exaggerated and solely driven by investors with long positions flocking to the exit. So there’s likely more downside to come.

In general there is a quite good relationship between net long speculative positions in Brent crude and WTI versus the global manufacturing cycle. Oil investors overall typically have an aversion of holding long positions in oil when the global economy is slowing down. As of yet there are few signs that the global economic cycle is about to turn. Rather the opposite seems to be the case. Global manufacturing fell in October and yesterday we saw US industrial production fall 0.6% MoM while continued jobless claims rose more than expected and to the highest level in two years. This matches well with the logic that the strong rise in interest rates since March 2022 is inflicting pain on the economy with more pain ahead as the effect comes with a lag.

Most estimates are that the global oil market is running a solid deficit in Q4-23. The IEA has an implied deficit in the global oil market of 1 m b/d in Q4-23 if we assume that OPEC will produce 28 m b/d vs. a call-on-OPEC at 29 m b/d. But prices in the oil market is telling a different story with weakening crude curves, weakening refining margins and a sharp sell-off in oil prices.

For 2024 the general forecasts are that global economic growth will slow, global oil demand growth will slow and also that the need for oil from OPEC will fall from 28.7 m b/d to 28.4 m b/d (IEA). This is a bearish environment for oil. The average Brent crude oil price so far this year is about USD 83/b. It should essentially be expected to deliver lower in 2024 with the negatives mentioned above.

Two things however will likely counter this and they are interconnected. US shale oil activity has been slowing with falling drilling rig count since early December 2022 and that has been happening at an average WTI price of USD 78/b. The result is that total US liquids production is set to grow by only 0.3 m b/d YoY in Q4-24. This allows OPEC+ to support the oil price at USD 80-90/b through 2024 without fear of loosing a significant market share to US oil production. Thus slowing US liquids production and active price management by OPEC+ goes hand in hand. As such we do expect OPEC+ to step up to the task.

So far it has predominantly been Saudi Arabia with a little help from Russia which together proactively have managed the oil market and the oil price through significant cuts. Saudi Arabia produced 10.5 m b/d in April but then cut production rapidly to only 9.0 m b/d which is what it still produces. Its normal production is about 10 m b/d.

What has made the situation more difficult for Saudi Arabia is the combination of solid growth in non-OPEC supply in 2023 (+2.1 m b/d YoY; IEA) but also a substantial revival in production by Venezuela and Iran. The two produced 660 k b/d more in October than they on average did in 2022. So the need for oil from Saudi Arabia is squeezed from both sides.

All eyes are now back at OPEC+ after the recent fall in oil prices along with weakening crude curve structures and weakening economic statistics.

OPEC+ will have to step up the game and give solid guidance of what it intends to do in 2024. If Saudi Arabia is to carry the burden alone (with only a little help from Russia) then it will likely need to keep its production at around 9.0 m b/d on average for 2024 and drop it down towards 8.5 m b/d in Q1-24. This may be too much to ask from Saudi Arabia and it may demand some of the other OPEC members to step up and join in on the task to regulate the market in 2024. More specifically this means Iraq, Kuwait and UAE.

The oil market will likely be quite nervous until a firm message from Saudi/Russia/OPEC+ is delivered to the market some time in December.

Saudi Arabia may get some help from President Joe Biden though as his energy secretary adviser, Amos Hochstein, has stated that the US will enforce sanctions on Iran on more than 1 m b/d.

Fortsätt läsa