General Index Oil Refinery

Global Market Analysis, 21 January 2022

- Geopolitical risk, supply concerns rattle oil market; Prices climb to highest since 2014
- Northwest Europe jet, diesel cracks test new highs on tighter supply; LPG holds steady

Geopolitical risk, supply concerns rattle oil market, prices climb to highest since 2014

Oil prices reached their highest levels since 2014 this week, as geopolitical risks and short-term supply concerns eclipsed new forecasts indicating supply could soon overtake demand.

General Index assessed Dated Brent at US$90.90/b on Thursday, 20 January, while General Index Dubai Partials (M1) topped out at $86.55/b on Tuesday before slipping back. Global benchmark Brent futures achieved $89.50/b intraday on Thursday, its highest since October 2014; while in the US, WTI futures peaked at $87.91/b on Wednesday.

General index, crude benchmarks

A trio of geopolitical tensions, while limited in their immediate impact on supply, highlighted the market’s nerviness at whether producers will be able to meet post-coronavirus pandemic recovery in fuel demand.

Russia (the world’s second-largest oil producer) has been massing troops near Ukraine’s border, fuelling fears an invasion could be imminent, and Yemen’s Houthi rebels launched a drone attack on the UAE (OPEC’s third-largest producer), resulting in petroleum tanker explosions near state oil firm Adnoc’s storage facilities.

Markets were also rattled by an outage (albeit a temporary one) on the Kirkuk-Ceyhan pipeline which carries oil from northern Iraq to the Turkish Mediterranean port. General Index Dated Brent has soared by 27% since the start of December. Diesel and gasoline benchmarks in the North Atlantic Basin are up by closer to a quarter. Even jet fuel, which has been sluggish in its recovery, is up by 30% on a flat price basis.

General Index ERP Prices

Recent jet fuel dynamics in Europe offer a glimpse of the risk for price shocks, particularly those product markets reliant on imports, as demand grows and refinery production returns to more normal levels. The General Index Jet CIF NWE Cargo crack reached US$19.67/b on Monday, having been under $11/b at the end of December.

A dip in cargo imports into Northwest Europe from East of Suez was partly to blame. Strong product cracks are a godsend to beleaguered European refiners who have spent the pandemic battling negative margins. Keen to support stronger cracks, those refiners are bringing dormant capacity back on at a slower pace than returning demand.

Jet fuel demand in NWE lags pre-pandemic levels by some28% this month, but local refinery output of jet fuel is still some 46% behind Jan 2019, according to OilX. With inventories at the lowest since Oct 2018, however, this cautious refining strategy leaves the region susceptible to higher prices if resupply flows are disrupted.

At the wider level, the International Energy Agency (IEA) this week raised its oil demand growth estimates by 200,000 b/d for 2022 to 3.3mn b/d, and said less onerous Covid restrictions to tackle the Omicron variant meant oil demand had “defied expectations” at the end of last year. Meanwhile, OPEC left its world oil demand growth unchanged at 4.2mn b/d for2022, with total global consumption expected at 100.8mn b/d.

The EIA last week raised its 2022 oil demand growth estimates to 3.6mn b/d.Oil prices had cooled by early Friday. A build in US crude stockpiles was enough for investors to pause for breath and take some profits. The EIA reported a minor crude stock of 500,000 bl last week.

Gasoline stocks rose another 5mn bl, while distillate stocks are down 1.4mn bl. Demand has been resilient to the latest Omicron-driven pandemic wave, and so, once again, Wall Street is forecasting $100/b oil. Opec+will face pressure to raise supplies to meet the predicted growth in demand. “The market’s saying: ‘More, please,’” Mike Muller, Vitol’s head of Asia, was reported by Bloomberg as saying this week.

Europe: Jet, diesel cracks test new highs on tighter supply; LPG holds steady

General Index, Jet vs ULSD

On middle distillates, the bullish momentum continued this week for both jet fuel and ULSD markets, with both markets testing new highs before slipping back.

The General Index ULSD CIF NWE Cargo crack topped US$17/b on Monday, while the corresponding jet crack approached $20/b. Diesel/gasoil stocks in the region have fallen to 235.8mn bl, the lowest since Jan 2019, according to OilX. Cargo imports from Baltic Russia and East of Suez are also lower this month. Kpler tanker tracking estimates the flows at 484,000 b/d, down from 640,000b/d.

Latest departures from Baltic Russia signalling NWE are also sharply lower this week, at 122,000 b/d compared to 453,000 b/d for the previous week, according to a Kpler snapshot at 1135 GMT on 21 Jan. For jet fuel, NWE arrivals from East of Suez in January are estimated at 159,000 b/d, down from 269,000b/d. On the MOC activity side, this week we saw an uptick of bids and offers in the ULSD CIF NWE Cargo window, with buying interest particularly active into cargoes arriving into UK and France. Comparatively, there was muted activity in the Mediterranean window.

LPG markets have continued the pattern of stability set since the last week of December on relatively balanced supply and demand fundamentals. The Propane NWE CIF Large Cargoes assessment only increased $20between 4-18 Jan, hovering around $700/MT.

The most notable price movement occurred on 12 Jan, when a BP bid in the spot pricing window for a ToT compliant cargo was left unsold, helping lift the propane large cargoes assessment $19 to $730/MT. This saw the physical propane-naphtha ratio increase to $-23.25, the highest it has been since 3 Dec, when it was last positive.

In the following six days the propane large cargoes assessment returned to $711, whilst the propane-naphtha spread widened to $-55.75. Despite minimal activity in the physical butane window, the butane to naphtha ratio has increased from 100%to 102%.

This has led to the physical butane crack to crude remaining steady this week, whilst the physical naphtha crack to crude has continued to grow more negative. On Tuesday the naphtha crack sat at $-0.95/b, its lowest since 24 Nov. LPG demand in NWE is estimated at 556,000 b/d this month, well below the five-year average of 651,000 b/d, according to OilX. A milder winter has left the market amply supplied. Stock sare around the five-year average.

David Elward, Senior Pricing Analyst
David Elward, Senior Pricing Analyst
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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