Supplementary data from the DOE report threw additional light on the future of things to come. In the first instance, refinery runs dropped to 84.3 % of total capacity. Unless margines improve in the US, it is going to be heavily dependent on imports. Having said that, the spare capacity implies that there is not likely to be any significant shortage of gasoline for a while.
A second interesting point of not was the surge in exports to 1.2 mbpd reflecting the fact that the arbitrage to the east is open as was reported in Reuters.
The import of this does not seem to have been lost on OPEC. The Iranian Oil minister, Bijan Zanganeh, mentioned that a rise above $55/bbl was not beneficial to OPEC as it will only lead to other suppliers capturing their market share. Iran, is already exempt from cuts although it has a cap on production.
Nigerian output has climbed to 2.2 mbpd from the 1.6-1.7 mbpd output it had in November.
Basis the above, we do not see any major impact on crude supplies over the next few months. Furthermore, there is always the temptation for compliance to slip going forward. We are not hearing any sounds about continued adherence to compliance which we were at around the same time last month.
We remain cautiously bearish the market and would continue recommending hedging March and April inventories even as the contango narrows and is close to flat. Another trade idea would be to sell the April-December spread hoping to reverse if the market flips into contango
The naphtha crack recovered a bit based on strong basic demand, notwithstanding ease in supply. The March MOPJ crack is valued at $ 1.35 / bbl. The Singapore crack for March is valued at a little above flat.
The gasoline crack continued to inch upwards. Gasoline was actively traded in the window with over 500 Kb being traded. The March crack valued at $ 11.80/bbl.
Gasoil cracks also moved up in response to stock data in Singapore which showed a drop of 1.1 Million barrels as also API data drop. However, this did not seem to do anything for jet prices.
The March crack is valued at $12.55 / bbl with the regrade at -$0.75 /bbl.
Fuel Oil stocks rose by another 2.5 Million barrels. However, the impact of this rise in stocks on Fuel oil cracks was muted. The March crack is valued -$ 3.9/bbl and April around -$ 4.15 /bbl.
It may be noted that fuel oil stocks are almost as high as last year and well above the 5 year average. However, the crack is much stronger than last year.
A major part of this improvement in value can be ascribed to a structural change in fundamentals arising with the creation of more complex refineries, the inability of Venezuela to provide stocks, demand for the product both in summer and winter. However, given rising crude prices, it could happen that Venezuela can extract and ship more crude. Also, there appears to be a distinct drop in demand for the product in Singapore.
The issue, therefore is, what is a reasonable level for the fuel oil crack? The average monthly settle for the crack over the last five years is of the order of -$ 5.85 /bbl. A reasonable question is “What is the shift that one can reasonably expect from the average given structural changes in the fuel oil market?”. There are no easy answers. The average settle for the last 3 years has been -$5.95 /bbl which seems to be counter intuitive to a structural change. The average for last year has been -$ 4.75 / bbl.
We are of the opinion that a reasonable expectation for this number would like closer to -$5.25 / bbl
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Disclaimer : All the views are the author’s personal views. These do not constitute an advice to buy or sell any commodity