General Index Oil Refinery

Global Market Analysis, 14 January 2022

- Brent climbs to new pandemic highs
- EIA raises 2022 demand outlook
- US diesel costs climb on cold weather heating fuel demand boost
- Europe LPG: Market Wrap Q4 2021

Brent climbs to new pandemic highs on stronger 2022 demand outlook

Bullish momentum has driven global oil markets to fresh highs. Brent crude futures were above US$85/b midday Friday in Europe, up some $3/b over the past week and into territory not reached since before the pandemic.

General Index, Brent LSGO Prices

Omicron’s relentless sweep across Europe and North America has broken coronavirus case number records (again) and dented fuel demand. But analysts don’t expect this short-term impact to derail strong oil demand growth predicted for the year ahead. Investors agree. Strength is reflected not only in the flat price rally, bullish structure is widening too on crude and products. LSGO futures backwardation is now above $10/MT on the prompt. 

Omicron’s impact on fuel demand has so far been less compared to previous waves, but the daily ritual of case number reporting still has the power to trigger market reaction and remains a short-term bearish risk. Prices dipped on Monday after the US reached 1.35mn new daily cases and France posted 350,000 – pandemic highs for the respective countries.

Booster vaccines have decoupled case numbers from serious illness and death; but as Omicron now spreads in Asia, where the booster rollout is only just getting started in many countries, disruption seems inevitable, at least in the short-term. India is in the grip of another wave. Covid cases have passed 170,000 and are rising sharply.

The vaccination rate is low at around 46%, fuelling fears the country could be hit hard again, less than a year on from the Delta variant which first ran havoc in India. Impact on fuel demand would soon be felt if the world’s third-largest oil consumer is forced into tight restrictions again.

Turning to supply, the bullish narrative remains supported by OPEC+ failing to hit the increases allowed under its production deal; concerns over a possible Russian invasion of Ukraine; and ongoing unrest in Kazakhstan and Libya. Production was returning to normal in Kazakhstan, where recent political unrest disrupted output at Tengiz. Libya saw supply recover to 1mn b/d after militia ended a blockade of western oil fields which included the nation’s biggest.

But poor weather then forced four oil export terminals in the east to close, and some producers were already reducing production to alleviate pressures on storage facilities.

Also in the mix for the bulls was a weaker US dollar after the head of the Federal Reserve indicated tighter monetary policy is on the way.

Crude stocks fell more sharply than expected in the US, according to the latest EIA release, but product inventories surged in a sign consumers were driving less due to Omicron. The EIA’s Short-Term Energy Outlook proved a rallying point for investors, as its global liquids fuel demand growth forecast for 2022 was raised to 3.6mn b/d. The increase was underpinned by demand for oil products returning to and surpassing pre-pandemic levels this year. But in case the bulls thought they were in for a free climb over the months ahead, the EIA predicted supply would grow faster than demand.

General Index ERP Prices

On Middle Distillates, jet fuel extended recent gains due to reduced cargo imports. The region has been outbid by the US and Asia for a slice of marginal barrels offered in the Mideast Gulf and India recently. Pricing is back at pre-pandemic levels in Northwest Europe despite aviation demand still lagging by a quarter. Stocks of jet and other middle distillates continue to fall in major trading hubs, a trend unlikely to end anytime soon if refiners remain cautious in bringing dormant capacity back online one step behind demand growth.

On Light Ends, flat price gains of nearly 4% were insufficient for Naphtha CIF NWE Cargoes to keep pace with Brent, pushing the naphtha crack into negative territory for the first time since end-Nov 2021. Several competitively-priced cargo offers in the NWE pricing window this week were unable to find buyers. The only MOC trade was Trafigura selling Totsa’s bid for a 12,500 MT cargo. Bearish supply indicators were also reported in the Mideast Gulf, where naphtha and gasoline lights ends stocks were higher at Fujairah this week. Europe’s naphtha shipments to Asia are expected to be broadly stable this month at around 210,000 b/d, according to Kpler tanker tracking.

On Gasoline, Shell offered a 95 Ron cargo CIF Thames in the daily MOC pricing window this week, likely for the first time; while Glencore bid for a cargo in the Mediterranean window, after what seems like a long absence. A decline in activity on 95 Ron Barges hints at less pricing exposure currently for deliveries into West Africa from Europe. Shipments this month are down 41% according to Kpler.

US diesel costs up as cold weather heating boost offsets stocks rise

A spate of cold weather is driving up costs for prompt ULSD across the United States, enabling the market to dodge pressure from robust builds in stockpiles.

The NYMEX ULSD futures premium for February over the April contract widened to +US$0.10/gal on Wednesday, 12 January, compared with a +$0.04/gal gap on 3 Jan, the first trading day of the new year. 

The March-April spread was at about +$0.05/gal, up from a little over +$0.02/gal.

The strength in prompt futures comes despite rising inventory. US stockpiles of ULSD rose 2.3% last week to 119.8 million barrels and now stand on the brink of topping 120 million barrels for the first time since early-Sep 2021. National ULSD inventory has risen in five out of the last seven weeks, according to the EIA. The healthy stocks environment will likely cap further price gains unless the cold weather situation deteriorates. 

Oil players with large amounts of ULSD in stock have been able to capitalise on interest in the prompt contract. Much of the East Coast has been engulfed by snow in recent weeks, prompting greater demand for diesel to be used for heating purposes. Pennsylvania experienced below-freezing this week, falling to a low of 21 degrees Fahrenheit (-6 Celsius).

The strength in distillates futures comes despite rising inventory. U.S. stockpiles of ULSD rose 2.3% last week to 119.8 million barrels and nearly topped 120 million barrels for the first time since early September. 

Europe LPG: Market wrap Q4 2021

The LPG market experienced some unusual activity and price movements throughout Q4 2021. In a quarter where light ends would usually be expected to experience relative strength, the spread across Europe of a new Covid-19 variant, Omicron, put significant pressure on light ends demand.

The uncertainty that followed led to a quarter where Propane NWE CIF large cargo prices ranged $250/MT and the ratio of physical butane to naphtha moved in a range of 94.5-109%.

General Index, Jet vs ULSD

The quarter began with a very tight LPG market, which was generating consistently high prices. In October propane large cargoes in Northwest Europe were only once assessed below $800/MT, averaging $837/MT across the month. Whilst propane remained high but relatively flat throughout October, butane saw prices rise by $60/MT between the first and last assessed day of the month.

Soaring natural gas prices were leading to increased demand for LPG. Norway’s Kaarsto processing plant announced a 20% reduction in October loadings to allow for more NGLs to be spiked into the natural gas streams. Many refineries also switched to burning LPG over natural gas to power their refinery furnaces, which, when coupled with record low US propane stocks, put immense pressure on LPG supply. 

US propane stocks were falling in October which followed its yearly trend, however, in absolute terms, they were sitting below their five-year range. This meant that the arbitrage from the US remained closed, leading to persistently high LPG prices. Low stocks and the knowledge of increasing winter demand on the horizon led to a large amount of bidding activity during October. Unsurprisingly, due to the supply pressures at the time, these bids were met with only six offers and no trades were completed.
Many of the trends seen within the October LPG market persisted into the beginning of November. With natural gas prices remaining high, a number of plant owners chose to leave LPG in the gas supply in order to improve revenue, further squeezing the supply of LPG to the Northwest Europe market. Naphtha prices remained steady and the propane-naphtha spread sat in the high double figures, keeping propane well out of the cracking pool.

Butane also outperformed naphtha, with the butane-naphtha ratio increasing to 108.9% on 2 November. However, it wasn’t long until an unseasonal fall in prices began, with propane large cargo prices falling $180/MT over the final 20 days of November. Propane prices now found themselves below $700/MT, where they would remain for the rest of the quarter at a time when winter demand would usually keep prices high.

General Index, Propane Large Cargoes

The end of November and start of December signalled the beginning of the Omicron variant’s impact on the LPG market. As expected, Omicron introduced a large amount of uncertainty, with worries of lower-than-expected demand impacting physical activity and prices. At the same time, the US-Europe arbitrage briefly opened for the first week of December, leading to a surge of VLGCs from the US into Northwest Europe.

In the same week, the spread between demand and supply was increased further by technical problems at Dow’s Terneuzen facility,  which led to some rapid selling into the local market. It was rumoured that at least one VLGC and two ToT cargoes were offered between 30 November and 3 December as  a consequence. These factors set a rather bleak picture for spot large cargo prices going into December.

OilX LPG Demand

OilX data shows that December demand did fall as the market had expected, and whilst it did not lie at the bottom of its five-year range, a fall in demand at a time of year where it would usually be rising produced downward price pressure. The fall in demand was exacerbated by activity in the physical propane window, which saw a drastic fall in bids during December.

This unusual activity culminated in propane large cargo prices dipping below $600/MT on 20 December. Propane was not alone in its price slump. Butane saw its ratio to naphtha fall below 100% in early December. This was driven largely by a recurrent Equinor offer at the end of November, which remained unlifted, pushing butane large cargo prices down $50/MT between 29-30 November.

The quarter ended on a much more positive note for both propane and butane prices. The market had appeared to stabilise after the initial early December shock and although activity still remained muted, prices did begin to gradually recover. Following on from Christmas, propane large cargoes edged towards $700/MT whilst the butane to naphtha ratio recovered to 100%, with large cargo prices slowly increasing to $739.50/MT on New Year’s Eve.

With a largely turbulent Q4, many may be hoping that the final week of the year guided the LPG market into a more stable 2022.

Jeffrey Baird, U.S. Refined Products Pricing Director
Jeffrey Bair, Pricing Director, Americas Refined Products
+1 (713) 301 9874
Arran Brodie, Energy Analyst
Arran Brodie, Energy Analyst
+44 7807 906395
General Index, Nakul Hirani
Nakul Hirani, Energy Analyst
+44 7944 852187
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