Marginal pause

Published at 11:32 18 Nov 2019 by

Users licensed for the data service can access our global balances.

Refining margins globally have deteriorated significantly as crude differentials continue to strengthen. Diesel is sliding towards contango thanks to a spectacular capitulation from the bulls, while winter gasoline continues to collapse. Even VLSFO is showing its first signs of weakness in the Atlantic basin and Asia—cracks declined last week to levels comparable with gasoline cracks.

Despite such weak spot margins, steeply backwardated crude markets may mean any run cuts will not occur immediately—it may look unappealing to run crude right now, but storing crude in tank could be even more costly. We think that even if margins fail to recover, any resultant fall in crude buying would only be visible in the December trade cycle for Europe and January–February for Asia.

Moreover, a lot of the bad news for diesel is already priced in, and there is upside to Q2 20 diesel cracks. This suggests spot margins should find a floor, while forward margins should recover. And contango in forward diesel margins limits the need for diesel-oriented refineries to trim runs. We are thus reluctant to call the top for crude timespreads and differentials here—it may just be a pause.

Ultimately, the loss in crude supplies is far more acute than any prospective loss in crude runs. OPEC is seeking to extend the current production deal through to end-2020, which would keep the group’s output around 30 mb/d, although heavy refinery works in Saudi Arabia in March 2020 could coincide with Aramco undertaking upstream work in fields that feed those refineries.

Non-OPEC supply growth is also stalling even with new project start-ups in Norway and Guyana as US production growth has halved y/y since July and is set to slow by another 25% in 2020. With our balances showing global stockdraws resuming from late November, crude markets seem well supported for now.

Fig 1: Singapore complex margin, $/barrel Fig 2: Brent and Dubai prompt timespread, $/barrel
Source: Argus Media Group, Energy Aspects Source: Argus Media Group, Energy Aspects

Log in to download

Other Perspectives publications

Risky short?

Published 5 days ago

2020-01-13 Oil - Perspectives - Risky short? cover
Users licensed for the data service can access our global balances.Despite heighte..

Read more

2020 outlook: upside surprise

Published 1 month ago

2019-12-16 Oil - Perspectives - 2020 outlook: upside surprise cover
Please note that this is the last Perspectives of 2019. Normal service will resume on 13 January..

Read more

OPEC: The return of the Saudi put

Published 1 month ago

2019-12-09 Oil - Perspectives - OPEC: The return of the Saudi put cover
Listen here to our Global Call recorded on Monday (9 December), in which we discuss the key takea..

Read more

OPEC: Saudis playing offense

Published 1 month ago

2019-12-02 Oil - Perspectives - OPEC: Saudis playing offense cover
Users licensed for the data service can access our global balances.Many in the mar..

Read more

The great run cut debate

Published 1 month ago

2019-11-25 Oil - Perspectives - The great run cut debate cover
Users licensed for the data service can access our global balances.The weakness in..

Read more