By John Kemp
LONDON, Aug 7 – Global crude exporters and refiners are locked in a stand-off, as OPEC+ tries to drain excess crude stocks and lift prices and refiners face falling fuel consumption and shrinking margins.
These drops are most evident in the market for middle distillates (gasoil, diesel and jet fuel) which have been hit hard by the twin impact of lockdowns and economic recession.
While Brent prices have recovered most of their losses since the outbreak of the volume war between Russia and Saudi Arabia in March, refining margins for mid-distillates are just half their pre-lockdown level.
In Northwest Europe, gross margins for making gasoil from Brent have fallen to less than $7 per barrel, from $13 in early March and $18 at the start of the year.
Margins remain trapped close to their lowest level for the last 20 years, in the fourth percentile, and have trended lower again in the last few weeks (https://tmsnrt.rs/30AZYVR).
In the United States, distillate inventories are 38 million barrels (27%) above the prior five-year average, at the highest level for almost four decades, and increasing.
Swelling inventories and shrinking margins signal the market is oversupplied and refiners need to purchase and process less crude in order to work down their own excess fuel stocks.
In Asia, some refineries have already indicated they will buy less crude from Saudi Arabia and potentially other Gulf exporters in September, after official selling prices were not cut by as much as anticipated.
Saudi Arabia´s efforts to accelerate the drawdown of crude inventories by pushing for maximum restrictions on OPEC+ output are starting to run into refiner resistance.
The tug of war, part of a broader stand-off between tightening production and softening consumption, explains why Brent spot prices and calendar spreads have failed to rise further since June.
Despite OPEC+ production cuts, Brent´s six-month calendar spread is stuck in the 31st percentile for all trading days since the turn of the century, indicating supplies are expected to remain ample for the foreseeable future.
– U.S. refiners trim crude processing as recovery falters (Reuters, July 23)
– OPEC+ hits the refinery wall (Reuters, July 17)
– Oil refiners and OPEC+ walk a tightrope as pandemic lingers (Reuters, July 16) (Editing by Alexander Smith)