Global Oil and Asian Product Market, December 2016
Oil prices in December rallied by 16 percent compared to November on the back of OPEC and non-OPEC meetings. Following the ‘Vienna Agreement’ decided upon at the 171st Meeting of the Conference of the Organization of the Petroleum Exporting Countries (OPEC) on 30th November, 2016, Ministers from OPEC met with a number of Ministers from non-OPEC oil producing countries on Saturday, 10th December, at the OPEC Secretariat in Vienna.
On 30th November, OPEC delegates agreed to cut output from October levels by 1.2 mn b/d to 32.5 mn b/d for an initial six months from 1 January, subject to non-OPEC production agreeing to cut by around 600,000 b/d. After that, additional cuts in support of OPEC were agreed by non-OPEC countries, led by Russia. A group of 11 non-OPEC countries have said they will cut production by 558,000 b/d. In this regard, Russia plans to curb output by “up to 300,000 b/d” from November’s 11.2 mn b/d, but other producers in the group already experiencing declines and their offers confirm the trend.
If all the OPEC pledges and Russia’s promised cuts materialize, oil market would reach to the new balance in the second quarter of this year, supporting prices.
Asian Product Markets
Light Distillates (gasoline, naphtha)
During November the naphtha market was bullish and reached to positive territory which the market did not face since April 2016. While starting December, the product started to wane sharply. The average of Naphtha crack during December – differential between naphtha prices and Dubai crude prices- fell back into negative territory on a barrel basis amid ample supplies and high arbitrage volumes over this month. Meanwhile, the M1 versus M2 market structure has shifted into contango, reflecting weaker fundamentals. Looking forward, Middle East exports should rebound in January as several refiners return from maintenance. Additionally, the Ras Laffan 2 condensate splitter will start up again in January, and with its gasoline units not expected to be completed until late 2017, elevated naphtha exports should be expected from Qatar if the restart is successful. However, with the West/East arbitrage spread already narrowing, February should see lower western volumes once again potentially helping to offset higher Middle Eastern exports.
During December, gasoline cracks declined slowly. The fundamentals are not as weak as the other light distillate product – naphtha-. This was mostly due to strengthening crude prices. Looking ahead, seasonal factors dictate limited support from the product side over the next month, although reasonably strong gasoline demand may provide a floor.
Middle Distillates (gasoil)
Gasoil market remained weak despite the higher arbitrage volumes from Asia to Europe. During November, the market reached to its peak in the year 2016. However, starting December, the market fell sharply. Looking forward, gasoil/diesel demand to increase further, supported in early 2017 by heating oil and by transportation demand over the summer.
Jet fuel market was on the downward trend but slightly compared to gasoil market. The rising heating demand continued to provide support. Meanwhile, the strength in the US market has attracted higher flows from Asia as imports of jet fuel into the West Coast increased.
Fuel Oil
The December fuel oil market was likely to remain almost balanced amid steady demand from both the end-user bunker market and for fuel oil cargoes within the region. On the supply side, the market sources said they expected between 4.5 million mt and 5 million mt of Western arbitrage fuel oil to arrive in Singapore in December.
In other market news, high sulphur fuel oil (HSFO) stocks rose 1.1% to 8.59 million barrels, while low sulphur fuel oil (LSFO) stocks remained unchanged at 3.21 million barrels.
Outlook for Products Market
According to the JBC report, it is expected a significant shake-up of product demand dynamics next year, with gas oil/diesel reclaiming a sizeable share of total demand growth. While 86% of total 2016 oil demand growth was from light ends (incl. LPG, naphtha, and gasoline.