Global oil and Asian product market, April
Crude oil prices sharply declined during March to post the lowest since the beginning of 2017. Price has been damaged by high crude inventories and the impact of a consistent growth in U.S. rig counts over the last seven months. In addition, lower economic growth from China and worries over Russian production also contributed to the decline in prices. It seems that OPEC and non-OPEC production cuts failed to draw down the global inventories.
According to the latest report published by Baker Hughes, U.S. oil rig count increased by seven to reach 609, the highest level in the last seventeen months. U.S. oil producers are likely to add more rigs in the coming months considering a potential growth in capital investments.
Apart from the U.S. production, lower than expected output cuts from Russia reduced traders’ optimism over the production cut agreement. Russia has lowered its output by 120,000 barrels a day in the first two months of this year, compared with agreed cuts of 300,000 barrels a day.
Lower than expected growth in the Chinese economy also impacted oil prices. China expects a GDP growth of 6.5%, lower than the previous forecast for a growth of 6.7%. Despite several negative indicators, oil prices had very limited downside movement, thanks to higher than expected compliance from OPEC producers. Starting April, oil prices speed up and reach to the levels was experienced in the year 2017.
Asian Product Markets
All products' cracks-products prices versus Dubai prices-increased during April compared to March.
Light Distillates (gasoline, naphtha)
Naphtha cracks improved slightly with some support coming from lower arbitrage flows from the West, expected in May. Asian petchem demand is still resilient thanks to healthy margins. However, there was a seasonal decline in the market due to the lower LPG prices. Lower LPG prices had a significant impact on feedstock switching dynamics partly due to strong aromatic prices. Looking forward, naphtha cracks is expected to be under pressure due to seasonal feedstock switching to LPG and petchem cracking capacity maintenance.
Gasoline cracks improved by strong demand and peak refinery maintenance. Tightening balances in Asia including tighter supplies from Chinese refinery supported the market. This was mostly due to the fact that China decreased the country’s gasoline export quota. Moreover, the continued strengthening in the Atlantic Basin was supporting the market. Over the coming weeks, gasoline cracks is expected to remain supported by tightening supply.
Middle Distillates (gasoil, jet fuel)
Jet fuel and gasoil markets were supported by tighter supply, owning to regional refinery turnarounds. Singapore stocks declined to a two-month low. More support came from the outage at the Qatar Ras Laffan condensate splitter, as at least one export cargo of jet fuel has been cancelled. Additionally, demand in Japan has recently increased, likely supported by cold weather in the Northern part of the country. Going forward, middle distillates cracks are likely to remain close to current levels despite a seasonally lengthening regional balance as some support will likely come from improving arbitrage economics amid a tightening European balance.
Fuel Oil
Fuel oil market weakened on low Singapore inventories and weak arbitrage economics from West to the East. The arbitrage from West to the East was less economic due to high VLCC freight rates. Moreover, fuel oil supply in Japan fell, amid the combined effect of refinery maintenance and CDU capacity shut downs , keeping export availability low. On the demand side, there were some supports from Pakistan.