Extract from crude oil:
Market participants will return from IP Week in London to find a USGC price deck significantly more expensive than when they left, and yet the overarching theme concerning US markets at IP week was bearish WTI. While sour crude prices were already strong in the shadow of Venezuelan sanctions, heavy Canadian supply reductions, and significantly lower inbound Saudi and Iraqi crude oil parcels after the OPEC+ agreement (with front Mars-Brent repeatedly printing inside Brent -$3/barrel), sweet crude prices are now in close pursuit. On Monday, the front MEH-WTI contract briefly soared to a $11.75 per barrel premium over WTI before settling at a slightly lower premium. As such, March MEH priced at a premium to ICE Brent in its last day of trading, while the April contract rallied in sympathy. The price strength in benchmark crudes like MEH has also been a topic of debate at IP Week, with some highlighting short covering and others pointing to disappointing production as key reasons. Both views have merit, as does the fact that Enterprise is likely filling its NGL crude conversion pipeline with Permian crude. But for us, it also signals that much of the new US output is 45 API or higher and of inferior quality. ‘Permian Lights’ was definitely the new buzzword in town, with a large part of the incremental volumes rumoured to be 44–50 API crudes—borderline condensates. For locations such as Cushing this becomes particularly relevant, since builds of non-deliverable condensates could give the appearance of a surplus at the hub (and indeed Cushing can continue building even with a strong Midland) but actually trigger a deficit of deliverable WTI quality crude, and manifest price strength into post-limits spread trading. Recent enforcements by various pipeline operators on light and ultra-light parcels highlights the market’s quality concerns, and benchmark Midland, MEH and LLS may find support as more specific pricing capability arrives on different qualities, while surplus-related price weakness manifests itself into condensate postings. Quality concerns aside, Gulf Coast assessments of both light and heavy are strong, and they continue to signal full outbound Cushing lines well into year-end as differentials continue to roll up.
Extract from oil products:
US gasoline inventories fell by 1.9 mb w/w to 254.9 mb, led by a decrease of 2.1 mb w/w to 87.4 mb (+2.2 mb y/y) in PADD 3. Gasoline moving along the Colonial Pipeline transitioned to 11.5 RVP specification, pushing USGC gasoline prices higher, with cycle 13 being the last cycle for the 13.5 RVP winter grade. PADD 1 stocks built by 1.0 mb w/w (+ 3.3 mb y/y) to 68.6 mb, despite regional FCC outages at the Bayway and Girard Point refineries pushing FCC offline capacity to 0.23 mb/d for the week ending 22 February. Imports into PADD 1 were elevated at 0.42 mb/d, higher y/y by 0.1 mb/d. The arbitrage from the USGC to USEC is workable on paper for RBOB and conventional 87-octane, while it remains closed for CBOB. In anticipation of a workable arbitrage, trading space on Line 1 has continued to trend higher, increasing by 0.38 c/gal w/w. With Bayway returning to service and Girard Point expected to return in early March, it would not be hard to imagine arbitrage economics to turn bearish once again. PADD 2 stocks fell by 0.9 mb w/w (1.5 mb y/y) to 58.5 mb. Both Wolverine and Buckeye Complex gasoline markets are trading at premiums to Chicago, with Buckeye premiums pushing to the highest levels seen since mid-January.