Europe’s inventories for middle distillates and heavier products have dropped sharply leading to refining margins skyrocketing with diesel now at $125 per barrel thanks to Saudi Arabia and OPEC+ maintaining their strict production cuts. A cross-section of analysts has predicted that Saudi Arabia is likely to extend its voluntary 1 million-barrel oil supply cut for the third consecutive month into October amid uncertainty about supplies, five Wall Street analysts have predicted. The initial cuts appear to have worked, with oil prices climbing about 15% in the past month to mid-80s level.
OPEC+ production has declined by 2.7 m b/d from Sep-2022 to Aug-2023 with the lion’s share having come since February this year. Global demand, on the other hand, has increased by 2.4 m b/d from Q3-2022 to Q3-2023 although the deficit has been partially offset by a 1.4 m b/d increase in supply by OECD producers, mostly U.S. shale oil (light sweet crude). Last month, the Energy Information Administration (EIA) forecast that total U.S. output will hit 12.61M bbl/day in the current year, eclipsing the previous record of 12.32M bbl/day set in 2019's and easily beating last year's 11.89M bbl/day. U.S. crude oil output is up 9% Y/Y blunting OPEC’s efforts to keep supplies low in a bid to goose prices. There is little doubt the U.S. Shale Patch is largely responsible for keeping oil markets well supplied and oil prices low: Rystad Energy has estimated that whereas OPEC and its allies have announced cuts amounting to ~6% of 2022's production, non-OPEC supply has made up for two-thirds of those cuts, with the U.S. accounting for half of that.
Still, record shale output by U.S. producers has done little to ease tightness in medium sour crude and diesel products, sending refinery margins skyrocketing. Although the current price of diesel in Europe is considerably lower than last year’s $180/b peak, it’s on par with the price of diesel from 2011 to 2014 when Brent crude averaged $110/b, meaning refiners are enjoying a field day. Indeed, the diesel refining premium in ARA is near $40/b while the premium for jet fuel has jumped to $45/b. Refineries usually make a profit on diesel, jet and gasoline but lose money on bunker oil leaving them with total refining margin ~$5/b before factoring in operating and capital cost, meaning net margins are sometimes in negative territory. The unusually high margins are encouraging them to buy large volumes of crude to turn it into the needed products. It’s the reason why demand for medium sour crudes is so high since they have rich contents of middle distillates. Throw in cuts by Saudi Arabia and even Russia, and the situation is not looking good for the consumer.
Extremely Volatile Gas Markets
Europe’s gas markets are the polar opposite of oil markets thanks to the continent being flush with the commodity. According to Gas Infrastructure Europe (GIE) data, EU inventories were 107.66 billion cubic meters (bcm) on 27 August, a mere 8.7 bcm below the GIE estimate of full capacity. However, the pace of increase in EU inventories has slowed quite dramatically, with spare capacity becoming limited in some areas. Inventory build for the past week clocked in at just 1.4 bcm, or 58.3% of the five-year average, thanks in large part to strong cooling demand and relatively poor wind power availability. Inventories are now 92.5% full, with most countries already above the EU’s 90% target fill-rate well ahead of the 1 November deadline. Indeed, of the 10 EU countries with the largest natural gas storage capacity, only France (at 88.4%) is below the target though, of course, it still has ample time to meet and exceed it.
Meanwhile,European gas prices have continued to be driven by developments in labor disputes in Australian LNG facilities, with strike action avoided in half the affected capacity but moving ahead in the other half, transating to potential disruptions of 5% of global LNG flows.
Last week, front-month Dutch Title Transfer Facility (TTF) natural gas prices fluctuated wildly in the EUR 28.985-44.8 per megawatt hour (MWh) range, before settling 5.8% lower w/w at EUR 38.414/MWh on 28 August. Still, Europe’s gas markets remain extremely volatile, with the 30-
day realized annualized measure rising 14.6ppt w/w to 145.2% on 28 August, just 2.2ppt below a 16-month high according to commodity analysis by Standard Chartered.
By Alex Kimani for Oilprice.com
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