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Even though we are trading peak turnaround barrels and there’s plenty of chatter about run cuts, voluntary and involuntary OPEC production cuts have tightened the physical crude market. If the market holds around these levels over the next few weeks (notwithstanding the usual volatility seen around IP week in London), there is only one way for prices to go: higher. Even though EFS has corrected recently, the start of April trading for Middle Eastern grades has been strong, with spot April Al Shaheen close to $1 premiums to Dubai, compared to 30 cents for March.
Yet the market seems to be suffering from a post-traumatic sell-off disorder, with Brent only just breaking $65 on Friday. Weak margins, run cuts, and concerns around the global economy are dictating proceedings. The armlet questioned the legitimacy of Saudi energy minister al-Falih’s comments about the Kingdom’s March production falling to 9.8 mb/d and exports to 6.8 mb/d (separate from the unplanned outage at the Safaniyah heavy crude field), while the broader belief (albeit incorrect) is that Venezuela will be able to redirect their lost barrels from the US to Asia.
Turnarounds and run cuts have been a red herring so far, and weak margins are a function of tight crude markets rather than weak products—products are in backwardation bar light ends. Post turnarounds, crude timespreads, led by Dubai, should rally, though Brent may be capped.
The refusal to acknowledge bullish news is also widespread in the WTI space. While the Keystone outage will result in large near-term builds, we are open to the idea that supplies may be disappointing (due, for instance, to the Bakken freeze-offs or the Permian’s low frac spread count, which is around 30 crews lower than November), so builds may not be as high as some expect.
|Planned offline CDU capacity, mb/d||ICE gasoil, M1-M2, $ per tonne|
|Source: Energy Aspects||Source: Argus Media Group, Energy Aspects|