Extract from crude oil:
Worldwide oil prices have started 2019 with a 9% recovery after a significant correction in Q4 18. Prompt ICE Brent has rallied by $4.92 and prompt CME WTI has rallied by $4.37, but contango persists in both benchmarks, with the front-month contracts discounted by $0.60 and $1.55 respectively versus Jun-19. However, the recent signal from crude grade differentials is very clear—physical markets have begun to rebound, especially in the medium sweets and sours markets, many by over $1 per barrel versus ICE Brent. Reductions in Venezuelan supplies and the coordinated supply reduction in Canada have lent support to North American sours (although for how long the Canadian rally lasts remains to be seen given spot arbs to the US are now shut even with the reduced tariff on Keystone and the incentive to cheat and raise production is likely to be very high currently), while OPEC+ supply cuts are boosting sour prices across the Atlantic basin. Iraq has today increased its February OSPs (+25 cents m/m for Basrah Light and +30 cents m/m for Basrah Heavy) for the USGC, following Saudi Arabia’s hike last week (+15 cents m/m for Arab Medium). Our tracking of regional trade flows (for details see Global arbs and trade flows, 8 January 2019) suggests that December Middle East OPEC liftings destined for North America were roughly 0.11 mb/d lower m/m at 0.85 mb/d (-50% y/y). January loadings are measly so far at less than 0.5 mb/d and loading programmes suggest that total loadings from Saudi Arabia and Iraq in January and February could be at record lows of 1 mb/d, or just below. This has been reflected in key USGC sweet-sour spreads, with the benchmark LLS/Mars spreads narrowing to $1.55 just before Christmas. The spread has since widened to around $2.50 as switching economics trigger re-optimisation in the eastern USGC refinery system, but levels remain below the $3 per barrel level averaged in H2 18. Meanwhile, the prompt time structure in Mars has shifted from contango to backwardation of around 15 cents, with LLS shifting even more powerfully to 35 cents (although linefill for the Bayou Bridge line likely amounting to 0.48 mb is also supporting LLS temporarily). Indeed, despite turnarounds, which are biased towards sour crude refineries in the USGC, the paltry volumes of Middle Eastern sours heading to the US amid good export demand for Mars keeps us bullish on the grade.
Extract from oil products:
US gasoline stocks increased by 8.1 mb w/w to 248.1 mb, with builds of more than 2 mb reported in PADDs 1, 2 and 5. The cumulative builds over the past two weeks amount to 15 mb—versus the five-year average build of 9 mb—pushing gasoline stocks 14 mb above the seasonal average. Colonial pipeline linespace continues to trade in positive territory, marking 40 straight days of positive valuation, the longest streak in more than 2.5 years. The premium for trading space is being driven by an open arbitrage from the USGC to USEC for all gasoline grades due to high USGC inventories (+ 7.6 mb/ y/y and 6.4 mb above the five-year average). We expect line 1 space to continue to trade at a premium, as barrels are pushed from PADD 3 to PADD 1, keeping the pipeline fully allocated, despite healthy PADD 1 stocks (+ 2.1 mb y/y and 1.9 mb above the five-year average). After a brief uptick in VGO demand last week as refiners rebuilt inventories after running down stocks for tax purposes, weak FCC margins dampened demand for feedstock. PADD 1 imports look set to rise later in the month, which should offset the planned maintenance at the PES refinery in Philadelphia set to start on 15 January. PADD 2 stocks increased by 2.7 mb w/w to 57 mb (+4.0 mb/ y/y), as the region remained self-sufficient and fully supplied, keeping the arb from PADD 3 closed.