Global Oil and Asian Product Market, August
Crude oil global prices in August 2019, was mainly driven by concerns about demand growth following an escalation in the US-China trade war (imposing a 10% tariff on $300 billion worth of Chinese goods by US from 1 September2019) and growing storm clouds over the world economy. Based on the American Petroleum Institute data, larger-than-expected US crude inventory draw (11.1 million barrels), and concerns that Tropical Storm Dorian might disrupt refined products supplies in the Caribbean region in late August impacted oil prices positively.
China first imposed a 10% tariff on imports of US LNG in September 2018, in retaliation for tariffs the US imposed on imports of Chinese goods. In June 2019, in retaliation for increased US tariffs, China raised its tariff on imports of LNG from the US to 25%. While pressuring the markets, the latest round of tariff hikes announced by the US and China this month, is expected to include crude oil in the latest list of Chinese 10% retaliatory tariffs on US goods which would likely to see flows return to levels seen over the winter of 2018- 2019, namely to zero.
There is still strong backwardation in structure of Dubai market which shows persisting strength. In fact, tight supply pushed Dubai crude forward structure in to backwardation. The Brent/Dubai EFS spread moved back to around $3 per barrel, while narrowed EFS in July compared to June dampened the competitiveness of Dubai-linked crudes compared to Atlantic Basin grades.
According to the latest forecasts, at least two banks and the US' official oil demand cut their oil price expectations for the coming 18 months, citing the escalation of the trade row and growing pessimism over demand. The US Energy Information Administration (EIA) on Tuesday cut its Brent spot price forecast to $64/b for the second half of 2019 and $65/b for 2020, from $67/b previously. It also trimmed its 2019 oil demand growth forecast by 70,000 b/d to 1 million b/d.
In 2019, oil demand is anticipated to grow by 1.10 mb/d year-on-year (y-o-y), a downward revision of about 0.04 mb/d from the previous month’s projection, mainly due to weaker-than-expected oil demand data from OECD Americas, Asia and the Middle East in 1H19. Total oil demand for the year is now anticipated to reach 99.92 mb/d. For 2020, world oil demand is expected to grow by 1.14 mb/d, in line with last month’s projection, with total world consumption anticipated to average 101.05 mb/d. This forecast is subject to downside risks stemming from uncertainties with regard to global economic development. The OECD region is estimated to be in positive territory in 2020 as OECD Americas is projected to show growth, while OECD Europe and OECD Asia Pacific are projected to decline. However, non-OECD countries are forecast to continue to account for most of the growth at 1.05 mb/d. China and other Asian countries are anticipated to lead demand growth both in the non-OECD region.
OPEC delivered a downbeat oil market outlook for the rest of 2019 on 16 August 2019, as economic growth slows and highlights challenges in 2020 as rivals pump more, building a case to keep up an OPEC-led pact to curb supply. In a monthly report, the Organization of the Petroleum Exporting Countries revised down its forecast for global oil demand growth in 2019 by 40,000 barrels per day (bpd) to 1.10 million bpd and indicated the market will be in slight surplus in 2020.
Call on OPEC in 2019 was revised up by 0.1 mb/d compared to the previous report to stand at 30.7 mb/d, which is 0.9 mb/d lower than the 2018 level.
According to secondary sources, OPEC crude production averaged 30.5 mb/d in 1Q19, about 0.3 mb/d higher than call on OPEC in the same period, while in 2Q19, OPEC crude production averaged 29.9 mb/d, around 0.8 mb/d lower than call on OPEC.
Asian Gasoline crack spread is in its highest level in two years affected by tightness in this market and refinery outages in India and the Philippines, which led to limited supplies amid an uptick of 42% in gasoline deliveries to the US during the month. As a result of positive performance of gasoline, reduction in outputs due to refinery outages, as well as firm regional demand, naphtha crack spreads rose.
The naphtha market remains in a state of oversupply, with spot cracks in Singapore continuing their downward trend since early April. The forward market is a bit more optimistic, albeit vs. very weak spot levels, with Argus citing expectations that West-of-Suez arb arrivals should be a touch lower m-o-m in September.
Gasoil/diesel cracks versus Dubai crude oil faced the largest drop-off during last week of August and as a result of this weakness in Singapore gasoil market, the East-West arbitrage came back in to more feasible territory and so there are more Indian volumes in the heading west. There is a positive performance in jet/kero crack as a result of the peak travel season and rising jet fuel demand. Despite ongoing monsoon season, lower gasoil supply supported gasoil prices.
Fuel oil crack spread versus Dubai crude oil decreased strongly and in fact this collapse was as a result of lower bunker demand following US-China trade war and economy weaknesses. Besides, decline in fuel oil demand has largely come from switching to cleaner fuels for power generation in Egypt, Pakistan, South Korea, and Japan.
A supply reaction from simple refiners on a sour crude diet may have provided some support, as margins for this setup have fallen considerably since the start of the month and forward margins, based on Reuter’s data, point to further weakness ahead.