The mood at the APPEC gathering in Singapore was far more upbeat than in the past few years. The only worry we have now is whether both prices and spreads have gotten ahead of themselves —so navigating positioning vs fundamentals will be key. Given the vast amount of US exports set to arrive in Europe, and that North Sea maintenance is finally coming to an end, a bit of retracement in Dated Brent is on the cards, although we expect backwardation to persist.
Indeed, even though refining margins have given up all their Harvey-related gains, the weakness in fuel oil is making margins seem worse than they are. Strong diesel pricing still offers incentives to continue running hard where possible, which is evident in the clean-dirty spread widening to its widest since June 2016 in both Europe and Asia. This should continue to support light crudes.
While APPEC discussions around Dated Brent were somewhat heated, there was complete agreement over the fact that refining capacity outside of China is close to maximum, which will support margins through 2018 amidst limited capacity additions. And it became increasingly clear through last week that, for now, China is focussed on clear skies, with extremely low product export quotas awarded for Q4 17. Should this trend persist through 2018, margins can soar.
Increasingly, the industry seemed less concerned about the outlook for 2018 balances, with our balances now showing a small stockdraw following the latest downward adjustments to US production forecasts. The only downside risk comes from a sharp slowdown in phenomenal demand growth (which, to our surprise, seems to have surprised a few), although we believe this is unlikely, especially with India, LatAm and possibly the Middle East set to recover next year.
|Fig 1: Clean-dirty spreads vs Brent-Dubai EFS||Fig 2: Global implied stock change, mb/d|
|Source: Reuters, Energy Aspects||Source: Energy Aspects|