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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|