Global oil and Asian product market, September
The market's need to adjust to the squeeze on Iranian exports, which has become veryvisible in the last few weeks, will remain a short-term focus. The cycle into autumnmaintenance has so far not been too pronounced in crude and the overall tightness in thebalance should provide a solid base to pricing even if more softening becomes apparent indemand. Russian crude and condensate output could top October 2016 levels in Q4 ascompanies ramp up production of newer fields. Condensate production should also increase together with natural gas ahead of the winter months.
After a couple of months of relatively lower readings on implied Chinese stock builds forcrude in line with slightly softening refinery intake. This will be driven at least by higher intake,which we expect to grow strongly y-o-y, and potentially by additional buying for stocks aswell, which could effectively tighten the Q4 balance even further.
While Brazilian crude output looks disappointing in the short term, the expectation is strong uptickof 200,000 b/d y-o-y in 2019 on the back of close to 1 million b/d of additional capacitycoming online over the course of this and next year.
Asian Product Markets
Light Distillates (gasoline, naphtha)
Atlantic Basin naphtha cracks have come down in line with a weakening gasoline complexPostpeakdemandseason.Weseerelativelylowchancesofareversaloverthenearterm,keeping naphtha firmly pressured. Additionally, steam cracking margins, whileremaining overall healthy, have shown signs of weakening, meaning players may not runas high as they did over the past few years. We could be looking at a return of naphthademand in the Americas, where rising ethane prices and strong aromatics prices maypull naphtha cracking capacity back into the market.
Asian naphtha cracks have remained relatively better supported, with overall lower pressureapparentonthelightendsEastofSuez.Seasonal turnaroundsscheduledforH2Arewellunderway, with demand elsewhere remaining firm. Tightening balances over Q4should help relief some of the pressure on West of Suez cracks.
Middle Distillates (gasoil, jet fuel)
Gas oil/diesel cracks east of Suez were range over the reporting month, but similar totheir counterparts in the West, continue to be well supported overall. Customs data out of Vietnam has confirmed that the Nghi Son refinery neared commercial production overJuly-August, with imports of diesel dropping by close to 40% y-o-y, providing somepressure on the wider market. Turnarounds and seasonally rising demand should providea firm floor for cracks going forward. Asian jet regrades remained firmly in negative territory on a barrel basis over the reportingmonth,withcracksneverthelessperformingwell.
SeasonallylengtheningbalancesinEuropearelikelytoweighsomewhatontheattractivenessofarbmovements,andunlessJapanfacesanotherstrongwinter,wewouldExpectregradestorefrainfromspikingtothelevelsseenlastyearoverthiswinter.
Fuel Oil
The collapse in HSFO cracks originated in Singapore before spreading to the West ofSuez. The fall came about from a confluence of factors, notably: 1) a lengthening of400,000 b/d in the Middle Eastern fuel oil balance between June and October; 2) astrong uptick in arrivals from West of Suez; 3) the loss of powergen demand from Pakistan;and 4) a still open NWE/Singapore arb spread, indicating that arrivals from the West should remain elevated even after peak demand. These factors trounced the mainsupportive factor, which came from Iran. Iranian fuel oil availability has already tight-ened in September on the back of refinery maintenance that lasted the whole of August at the Iranian Bandar Abbas plant, while interest in volumes loading beyond Septemberis likely to be very low given the resumption of US sanctions on Iranian oil exports inNovember. As in the West of Suez, the expectation is fuel oil cracks to stabilize a little over thenext two months before continuing their decline in line with IMO 2020 pressures.