Global oil and Asian product market, October
Global crude oil price edged higher, underpinned by a fall in the US oil rig count slowing growth in US output which is aiding OPEC's efforts to rebalance the market. Meanwhile, geopolitical uncertainty in the Middle East as the threat of supply rose. Investors monitored ongoing unrest in Iraq following an independence referendum in Iraq’s Kurdistan region last month that threatens to disrupt the operation of a pipeline that carries 500,000-600,000 barrels of crude per day. However, Iraq plans to boost export from the South to make up for the loss of revenues after a retaking of federal fields from the semi-autonomous Kurdistan region led to a temporary shutdown. Oil production from central and southern Iraq will be directed to the Basra Oil Company, which will boost export by 200,000 b/d.
In addition to the above, signs of bullish Chinese demand, as well as falling stockpiles in the US supported the upbeat mood of the market.
Despite the bullish signals, analysts warned that the Organization of the Petroleum Exporting Countries needed to extend its agreement to reduce oil output beyond its current expiry date -March 2018- in order to rebalance the market. The original deal, struck nearly a year ago between OPEC and 10 other non-OPEC countries led by Russia, was to cut production by 1.8 million barrels a day for six months. The agreement was extended in May 2017 for a period of nine months until March 2018 in a bid to reduce global oil inventories and support oil prices. The upcoming OPEC Conference is due to be held at the OPEC Secretariat in Vienna on 30 November 2017.
Due to the widening range of WTI and Dubai differential, arbitrage from US to Asia was opened and export from US to Asia increased.
Asian Product Markets
During October, all Asian products market except naphtha was on the downward trend, confirming their weak fundamentals.
Light Distillates (gasoline, naphtha)
The Asian gasoline market went down due to the seasonal decline in demand over the winter season. Gasoline market was correcting its upward trend following an overselling. Therefore, the market was quiet ahead of end of year months.
Asian naphtha crack spread- differential between naphtha prices and Dubai crude prices- was strong. Demand in the Asian naphtha market remained strong as steam crackers were running at full capacity amid strong margins. Moreover, LPG prices were still higher than naphtha. Therefore, there is no chance for the units to substitute naphtha with LPG. On the supply side, higher arbitrage volume went into Asia from Europe. However, the market is still tight due to the considerable demand.
Middle Distillates (gasoil, jet fuel)
Lackluster buying interest continued to weigh on sentiment in the Asian gasoil market. Furthermore, fresh export from China after additional export quotas could exert more downward pressure on the market. On the supply front, market sources said that lower requirements amid steady to higher run rates had led several refineries to send more barrels into the spot market.
The Asian jet fuel market weakened during October amid underwhelming buying interest and unattractive economics to move cargoes to the US West Coast or Northwest Europe. Activity in the North Asian market in particular was muted, though some participants were optimistic the upcoming winter heating demand season would provide a boost in the upcoming period.
Fuel Oil
Asian fuel oil market was at its lowest in the past five consecutive months due to weak demand from both bunker and power plant sectors. The market sentiment has stemmed largely from higher cargoes moving into Asia from Europe. On the stocks front, Singapore's commercial stockpiles of heavy distillates rose exerting more pressure on the market.