Global oil and Asian product market, November
Crude prices on average rose around 9 percent. Crude oil futures and physicals traded higher, as market participants looked ahead to OPEC's next meeting at the end of November for news on a probable extension of production cuts. While many market observers regard the potential extension of the OPEC production cuts as the next key event which could support oil prices, others argue that it will take more than OPEC cuts to ensure prices remain supported. Some market players believe that the need to further extend the agreement shows that OPEC strategy is not working and that the production surpluses are only slowly being eliminated from the market despite very dynamic demand.
Another factor which continues to loom over market is US ever-expanding production and exports, and the likelihood that higher oil prices will encourage US shale producers to increase their output. IEA stated that US will account for 80% of the global increase in oil production over the next 10 years. Consequently, OPEC's strategy of artificially tightening the market is hardly likely to work in the long term. Prospects of rising shale output also added bearish pressure with EIA's latest Drilling Productivity Report stating that US shale oil production may increase 80,000 b/d to a record 6.17 million b/d in December, Commerzbank analysts noted.
OPEC and its 10 non-OPEC partners will meet November 30 in Vienna to discuss the future of their 1.8 million b/d production cut agreement, which is set to expire in March. The major OPEC members are pushing for a nine-month extension of the cuts through the end of 2018. But other members of the coalition, notably leading non-OPEC participant Russia, remain less convinced of the need to announce such an extension at the November 30 meeting.
Asian Product Markets
Market fundamentals were healthy among the Asian products.
Light Distillates (naphtha, gasoline)
Asian naphtha supply remained tight amid strong demand, keeping the naphtha crack on its highest level during the year 2017 and cracking margin was high enough for petrochemical companies to run their steam crackers at full capacity. Industry sources said that demand for naphtha in Asia was strong amid high operating rates of steam crackers. The strength of the LPG swap versus naphtha faded further, after the spread between the December Argus Far East Index propane swap and Mean of Platts Japan naphtha swap sank. LPG is the alternative feedstock for petrochemical production, and the recent strength in LPG had seen petrochemical makers leaning more towards naphtha. North Asian petrochemical makers were also running their crackers at high capacity ahead of the festive season next month. Naphtha stocks were typically drawn down during the fourth quarter, and that Western arbitrage barrels streaming into East Asia were helping to ease the tightness this year.
The Asian gasoline market weakened slightly after peak summer season. Summer season finished and demand waned. Furthermore, US gasoline stocks rose adding more pressure to the market. Asian gasoline market was silent after summer and ahead of new year holiday.
Middle Distillates (gasoil, jet fuel)
The Asian gasoil market remained steady compared to October. The suppliers were struggling to find alternative homes for surplus barrels. With unviable arbitrage economics to divert barrels from Asia to the west of Suez, cargoes were heard heading to the main trading hub of Singapore, amplifying supply pressures.
Fuel Oil
Asian fuel oil market was mute during November with less activities on both bunkering and power plant demands. Fuel oil stocks in Fujairah fell during November not indicating a shortage, but as a function of lower bunker demand at the port, combined with the backwarded market structure, that does not provide any incentive to carry excess inventory. Looking ahead, the value of December Singapore fuel oil versus Rotterdam Barges spread traded down, a drop of around $3.50/mt compared to last month, reducing the attractiveness of arbitrage flows from Europe to Singapore in the coming month, supporting Asian fuel oil fundamental.