Global arbs and trade flows

Published at 18:36 8 Jan 2019 by

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Global waterborne and pipeline crude oil exports were higher by 0.31 mb/d m/m in December at 47.12 mb/d. Following a sharp rise in exports in November, OPEC+ agreed on 6 December to lower their production levels by 1.2 mb/d. Saudi Arabia had already announced a cut of 0.5 mb/d for its December exports ahead of the OPEC meeting. The OPEC producers’ 0.23 mb/d exports drop in December is mostly on the back of lower Saudi (-0.65 mb/d m/m), Venezuelan (-0.2 mb/d m/m) and UAE (-0.1 mb/d m/m) loadings.

However, the market continued to face an onslaught from the US, which is hiking its exports as port facilities improve and loading capacities grow. In December, US crude exports hit a record level of 2.51 mb/d. On the back of weak VLCC freight rates in the USGC, for the first time, a VLCC was used to bring crude from the US to Rotterdam. There was a limited restart in Chinese buying of US oil but most of the December barrels had already been committed prior to the trade war ‘ceasefire’ being agreed. January should see more US cargoes going to China, but the increase will be capped by Chinese refiners’ concerns over the future of the bilateral trade relationship.

December flows were marked by weaker Asian intake because of softer demand. Naphtha-rich grades picked up somewhat in Asia. Naphtha also recovered in Europe, as did gasoline cracks thanks to better WAF demand and the resumption of traffic down the Rhine. Warmer weather than usual in Europe and Asia limited demand for HO- and fuel oil-rich grades.

In January, OPEC+ cuts will be in full effect and we expect exports to drop below 25 mb/d, with Saudi Arabia leading the way, but the market will remain unbalanced as refinery maintenance starts and lasts through till May. Moreover, US light sweet exports will remain high, with output flatlining rather than declining and high refinery maintenance in PADD 3. In Europe, the refineries undergoing work will impact about 0.6 mb/d of light sweet and 0.3 mb/d of sour barrels, whilst the US will release mostly light sweet barrels. In Asia, during April peak refinery maintenance, about 1.8 mb/d of sour and 0.6 mb/d of light barrels of refinery demand will be offline.

OPEC producers are targeting their cuts to the US market where the grades are medium to heavy, leaving the market long light sweets. Demand growth in 2019 will come from new sour crude-fueled refining capacity. Therefore, the only hope for the light sweet complex is that OPEC+ producers revise their policy and cut more light barrels. Unsurprisingly, even with upcoming maintenance, the contango in Mars has virtually disappeared.

Falling oil prices might also force some US producers to slow their production growth, although even if production ends up being flat q/q, with hefty refinery works, waterborne exports will remain high at or above 2.3 mb/d through Q1 19. The flows out of the US have been arbitraged based on varying netbacks. 2019 will still see a reshuffle in trade flows with refiners more sophisticated in trying new grades. With US grades trading late and producers keen to price their crudes aggressively to gain market share, refiners are more sanguine about their ability to buy barrels. As a result, the urgency to buy crude despite large disruptions such as Iran, is missing. The picture may change in H2 19 as markets tighten amidst rising demand but early 2019 should continue to be a buyer’s market, with ample choice of crudes, especially for light sweet barrels.

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