General Index Oil Refinery

Global Market Analysis, 11 March 2022

- Sanctions and supply confusion triggers historic oil volatility
- Road fuel buyers in Western Europe feel pinch of record pricing
- US fuel prices recoil after record highs, volatility deters cash market entrants

Sanctions and supply confusion triggers historic oil volatility
By Arran Brodie

Volatility has been the word of the week. Oil markets were roiled by uncertainty over how sanctions targeting Russia will impact crude and product supplies and considered how soon demand destruction would begin to take hold at these high price levels.

General index, crude benchmarks

In Europe, General Index Dated Brent crude peaked at $137.75/b on 8 March, taking gains on the closely-watched benchmark for North Sea light sweet crude to $31.17/b (+30%) since Russia first launched its military invasion of Ukraine on 24 February.

The gains on ICE LSGO, the region’s key diesel futures benchmark, were even more striking, notwithstanding exuberant trading dynamics in the lead up to contract expiry. M1 rallied to almost $1,550/MT at 1630 UK time on Wednesday, up 85% since the war began. The spike on the very front of the curve resulted in M1/M2 backwardation reaching +$376.50/MT at one point, a massive rise from the previous week’s peak of $84.75/MT.

Meanwhile in Asia, General Index Dubai Partials (M1) also made large gains, climbing to a peak of $127.75/b on Wednesday, up over $11/b from the week before.

General Index, ICE LSGO

Supply fears have led to prices reaching extreme highs and skittish market observers hung on every news story – even more so than usual it seemed. This, at times, resulted in massive intraday trading ranges. For example, on Wed, 9 March, Brent oil futures traded in a within a record $26/b range. Investors first rushed in on fears over direct sanctions on Russian oil, only to later withdraw at pace when a senior UAE diplomat said it would urge OPEC to increase production.

On Tuesday, President Biden announced the US would ban, with immediate effect, the import of Russian oil and other energy sources. This was closely followed by announcements from the UK and EU. Both economies rely more heavily on imports from Russia than the US, however the UK still committed to ending all imports of Russian oil by the end of this year. The EU stated that by year end it would reduce imports of Russian natural gas by two-thirds.

Although the EU has not itself banned Russian imports of oil, many oil and gas majors have taken it upon themselves to stop buying from Russia. After receiving widespread condemnation for their purchase of a Russian Urals crude cargo last Friday, Shell this week announced it would immediately halt any new purchases of Russian oil. BP swiftly followed suit, albeit a little less emphatically. Both companies warned there would be no quick replacement for Russian crude and refinery output would likely be negatively impacted by the move, leading to supply shortages.

The first signs of these supply shortages was presented on Monday, when Shell began reducing spot sales of heating oil and diesel to some German wholesalers in order to ensure contractual obligations could still be met without Russian imports. The reduced supply of diesel is beginning to impact many European nations (see Nakul Hirani analysis below). In the UK, where one-third of diesel imports come from Russia, prices on Tuesday rose by three pence per litre, the second-largest daily increase since 2000. On 9 March, motoring organisation RAC reported a record high pump price of 165.24 pence per litre. In France, the world’s largest importer of diesel, the price of diesel overtook gasoline for the first time in recent years. General Index assessed ULSD 10ppm NWE CIF Cargoes at $1558.50/MT on 9 March, an increase of $510.25/MT from the same time a week before. Diesel price increases may be further exacerbated by news that Aramco trading are looking to purchase diesel for delivery at a number of ports in Saudi Arabia, in an unexpected move from the net exporter.

Russia mounted its own response to the West’s sanctions. Following Germany’s decision to halt approval of the Nord Stream 2 pipeline and as rumors of new Russian oil import bans began to spread, on Monday, Russia’s Deputy Prime Minister Alexander Novak warned it would have every right to reduce gas shipments through the Nord Stream 1 pipeline. But the first retaliatory measures announced by Russia Thursday did not cover oil and gas.

Elsewhere, the market received mixed messages about the willingness of OPEC+ to reduce the impact of supply shortages. On Tuesday, Saudi Arabia’s leaders refused to take calls with the US, which has been pushing hard for bigger and faster production increasing to cool oil prices. The next day, oil prices did fall, very sharply, when it was reported the UAE and Iraq were both willing to increase production in an attempt to offset the lost supply from Russia. But any relief thinking Russian oil supply disruption would be offset by other suppliers was short-lived. The UAE’s Minister of Energy and Infrastructure later tweeted the “UAE is committed to the OPEC+ agreement and its monthly production adjustment mechanism”, contradicting what the Emirate’s ambassador to the US had previously signalled. Prices rose again accordingly.

With uncertainties around OPEC’s willingness to increase production, the US has also begun looking at the possibility of reducing restrictions on Venezuela in order to plug the gap left by the loss of Russian imports.

Further fears that global oil supply flows may continue to tumble arose on Wednesday when China ordered a halt to gasoline and gasoil exports from April. Increased oil prices and reduced supply has caused refinery throughput to decline and the Chinese government is keen to hold onto domestic output in order to stabilise prices. This will likely impact Asian countries the most, with countries such as Pakistan heavily reliant on Chinese imports.

Kazakhstan has an economic crisis on the horizon as crude exports are threatened by the Russian invasion of Ukraine. Crude makes up 57% of exports and accounts for 14% of GDP, however most of it flows from Kazakhstan in a pipeline through south Russia to a port just 200km away from Mariupol, Ukraine, a focal point of Russia's military strikes. This is close enough for tankers to incur a war risk premium, which in turn is leading to fixture cancellations. Kazakh crude transported through this pipeline is mixed with Russian crude and so any bans on Russian oil are likely to be imposed on this Kazakh oil too.

Elsewhere in Asia, South Korea looks to have a naphtha shortage on its hands, with 25% of its imports usually coming from Russia. Demand will have to shift to the Middle East, however it is likely this will increase naphtha prices and naphtha-fed crackers will have to reduce operations while supply is short. This would prove beneficial for petrochemical producers elsewhere in Asia who use gas-fed crackers, as LPG prices remain relatively weak compared to naphtha.

Road fuel buyers in Western Europe feel pinch of record pricing
By Nakul Hirani

The impact of sanctions imposed on Russian oil by western governments, as well as so-called ‘self-sanctioning’ by suppliers, has been quick to be felt by end consumers across Europe.

In Great Britain, average diesel pump prices hit all-time highs this week, surpassing GBP £1.65/litre midweek, according to government data (that’s the equivalent of c.$8.24/gal for our readers in the US who are contending with record fuel prices of their own.)

A noticeable spike in fuel sales seen at the end of last month across England, Scotland and Wales, as war first brewed in Ukraine and drivers rushed to fill up their tanks in expectation prices would rise, has since subsided. Average sales at sampled filling station for both diesel and petrol peaked at 23,662 litres on 24 February, falling to 17,303 litres a week later on 3 March.

In France too, consumers are feeling the pinch. Diesel prices overtook gasoline for the first time in recent years, as the world’s biggest importer of diesel feared it was face the brunt of supply disruption due to Russia’s pivotal role as a diesel exporter to Northwest Europe.

The General Index ULSD CIF NWE Cargo crack spread to Brent futures was assessed at +$87.02/b on 9 March, up from +$30.67/b a week earlier. The corresponding value for the Med was assessed at +$87.49/b, up from $31.44/b. Flat prices values on the underlying diesel futures contract (ICE LSGO) surged ahead more rapidly than gains seen on Brent crude futures.  

General Index, ICE LSGO Brent

Kpler tanker tracking shows Russia account for more than one-third of France’s combined diesel/gasoil seaborne cargo imports last year of 437,000 b/d – a similar proportion to the UK. For Germany, while the overall volume imported was much lower than for both France and the UK, proportionally it was much more exposed to Russia, accounting for more than two-thirds of distillate imports.

Elsewhere, Shell, Europe’s largest oil company, said this week it would stop buying Russian oil and gas. It also announced it would begin limiting sales of heating oil to some German wholesalers. German heating oil is very similar to Europe’s diesel, hence the squeeze on this specific heating oil blend.

In the wider diesel market, key regional price benchmarks pointed to significant tightness. Backwardation on Europe’s diesel futures contract widened into triple-digit territory this week.

On the face of it, this suggested buyers were willing to pay increasingly hefty premiums to obtain immediate supply rather than in a months’ time. But the scale of the prompt strength and its connection to the real physical market appeared to be distorted by trading in the build up to front-month contract expiry.

Backwardation on ICE LSGO M1/M2 (Mar/Apr) settled at +$343.75/MT on 9 March. But upon expiry of the March-2022 contract the following day at 1100 GMT, the spread had fallen to +$33.75/MT. At 1521 GMT, the new prompt M1/M2 spread (Apr/May) was trading around +$33/mt.

Stocks of diesel/gasoil are expected to continue to come under strain. OilX data for OECD Europe estimates inventories at 392.466mn bl this month, down 1.5% on the month and 13.5% lower than a year ago.

Demand for distillates, meanwhile, continues to climb. Consumption is seen at 6.349mn b/d in March, up 204,000 b/d on year-earlier levels. It compares to a five-year average up to 2019 of 6.428mn b/d.

Liquidity in Europe’s end-of-day pricing windows for 10ppm diesel and 0.1% gasoil cargoes plummeted this week due to the extreme pricing volatility and trading uncertainty linked to Russian sanctions. No offers and just six bids were reported in the Market-On-Close process over Mon-Wed for gasoil/diesel cargoes across both Northwest Europe and Mediterranean markets. This compared to a total of 45 bids and three offers last week.

US fuel prices recoil after record highs, volatility deters cash market entrants
By Jeffrey Bair

Right now fuel across North America is behaving like a box kite on the end of a well-worn string – you never know where it’s going and it seems like it might break away and fly across the continent at any minute. April ULSD futures fell almost US$1/gal Wed, 9 March, to close the cover on a war-related spike at Nymex New York Harbor Futures. The price jump had taken diesel to a record $4.88/gal at the retail pump the same day, and that eye-popping value should begin to ebb almost immediately.

General Index, ULSD

The volatility in ULSD and gasoline futures kept many cash players on the sidelines at midweek and reduced liquidity in fuel markets. Gasoline trade already had been reduced with the last of spring-grade fuel sold ahead of the transition to summer product.

Gulf Coast ULSD rose more than 50% from 24 Feb-8 Mar, before Wednesday’s crash landing. The big moves in futures have created some unusual spreads across the states. Someone able to ship a Chicago diesel barrel to Pennsylvania stood to benefit from an arbitrage suggesting potential profit of 30 cts/gal. Jet fuel on the Colonial Pipeline briefly dipped to a 35-cent discount to ULSD before moving back to a discount of 20 to 25 cents, with BP selling at both those extremes.

Gasoline in Oklahoma found a 40-cent discount to futures – nearly double the same discount seen in nearby Houston. Gasoline imports are picking up on both the East and West coasts according to federal government data, with shippers hoping to capitalize on rising US retail value. Like diesel, gasoline hit a record retail average price this week amid predictions of higher prices in weeks to come.

Arran Brodie
Arran Brodie, Energy Analyst
Virginia Bridgewater
Nakul Hirani, Energy Analyst
Jeffrey Baird, U.S. Refined Products Pricing Director
Jeffrey Bair, Pricing Director, Americas Refined Products
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