General Index Oil Refinery

Global Market Analysis, 25 February 2022

- Putin strikes match on Ukraine invasion and oil prices ignite
- Butane climbs above propane in Mideast Gulf on cargo shortage
- Chinese refiners snap up crude cargoes on strong cracking margins
- European propane/naphtha spread moves below $-100/MT as US stocks fall further
- Place your bets on US gasoline demand roulette as bumper summer awaits

Putin strikes match on Ukraine invasion and oil prices ignite

An all-out Russian attack on Ukraine has sent oil prices rocketing, as investors rushed to commodity safe havens and ditched stocks. In Europe, global benchmark Dated Brent was assessed by General Index at $106.50/b on Thursday, 24 February, a new highest level since September 2014. Brent futures hit a high of $105.79/b, before settling back at $99.08/b in what appeared to be a case of buy the story, sell the fact, as it became clear Russian oil would not be targeted in the first wave of sanctions by Western nations. US WTI futures got to $100.54/b before falling to $92.81/b. In the Middle East, General Index Dubai Partials (M1) were assessed up $5/b on the day at $98.60/b.

General index, crude benchmarks

In what is shaping up to be the biggest attack by one state on another in Europe since the Second World War, the first wave of nearly 200,000 Russian forces encamped on Ukraine’s borders began to move in on its neighbour on Thursday. It capped an extraordinary week in which President Putin used a series of carefully choreographed broadcast events to first signal Russia’s support for breakaway regions in eastern Ukraine.

Markets were first roiled by Putin’s announcement a “peacekeeping” operation would be deployed to support the rebels. Brent futures broke the $100/b threshold. It would prove to be a precursor to the main event.

Thursday’s multi-pronged attack across the country led prices to shoot up even higher. Brent added +$7 to smash through $105/b at its peak. While the US and its allies have been warning for weeks their intelligence pointed to an imminent Russian invasion, others had held out hopes of a diplomatic solution. Even prior to Thursday’s escalation, some in the market East of Suez told us they expected/hoped/guessed Putin would constrain his activity to eastern Ukraine, claim victory, and allow oil prices to retreat.

One analyst even told General Index that he was short flat prices! Do they know something we all don’t…?Elsewhere, indirect negotiations between the US and Iran are ongoing and the mood music is improving, suggesting a deal could be achieved soon. Helima Croft, global head of commodity strategy at RBC Capital Markets, told a Bloomberg virtual event this week the odds of a deal are better than 50:50 and predicted it would come by Easter. The release of Iranian crude to the market, however, could take some time, given the length of the implementation period of any deal.

High dependance on Russian oil makes sanctions unlikely, but some already avoiding risky deals

Western governments are drawing up sanctions to punish Russia. With the exception of Germany’s decision to put on hold certification of the Nord Stream 2 gas pipeline, they don’t appear eager to target Russia’s energy exports. Policymakers are caught in a tricky situation (to put it mildly) and are reluctant to curb supply at precisely when the market is crying out for more barrels, prices are at their highest in over seven years, and inflation is no longer "transitory".

General index, crude benchmarks

Goldman Sachs said in a report last month that the West’s decision in 2014 not to go after Russia’s energy exports when it annexed Crimea set a precedent which makes such a decision now “unlikely”:

“[T]he negative impact on Russian oil revenues would be limited by its ability to redirect most flows and would further come at the cost of higher oil prices globally with finally the risk of retaliatory gas shortages in Europe.”

If the unlikely scenario became a reality, how would Europe suffer? Let's crunch the numbers on diesel and gasoil flows, as an example, to breakdown just how reliant is the region on Russia and consider what are the alternatives? Russia is the largest-single country supplier of diesel/gasoil to Europe. It supplied 549,000 b/d to NWE in 2021, equivalent to more than 40% of NWE’s imports (the same as Europe’s exposure to Russian natural gas); while some 20% of the total flows imported by the Mediterranean Basin and Black Sea were from Russia, according to Kpler tanker tracking.

If Russian oil products exports were to get swept up in a new sanctions regime, where else could Europe turn to access the distillate fuel it needs?

China’s policy shift has seen diesel exports fall to a trickle, which presented an opportunity for India to ratchet up and plug the gap, a trend highlight noted by Vortexa’s chief economist at the company’s London gathering earlier this week for International Energy Week. Europe will nonetheless have to compete with a tighter Singapore market for Indian barrels.

Global refining is already constrained and inventories are low, demonstrated by +$23/MT backwardation on ICE ARA Gasoil futures, which reflect the low-sulphur diesel market in Europe. The Middle East has new refineries in the pipeline, built in part with destination markets like Europe in mind. But such capacity would not be unable to swing into action at such short notice.

Curbs (formal or informal) on Russian exports would inevitably send diesel prices in Europe spiralling higher. Higher cash premiums could attract replacement cargoes. Indian cargoes which have increasingly been placed into the Pacific Basin could be tempted back toward the Atlantic. The US was until a few years back the second-largest diesel exporter to Europe. But this flow has been declining since 2017. Diesel demand is also roaring in the US, keeping more barrels at home. A further 600,000 bl of distillates were drawn down in the US last week, according to the EIA, leaving distillate inventories some 18% below the five-year average.

Consumption is recovering strongly in other diesel-producing countries such as India too, so pulling cargoes to Europe would require substantial premiums – well above current levels. That’s doable, but at some point, end-consumer demand would surely be eroded by record fuel costs. Such realities justify Goldman Sachs’ position that targeted action on Russian exports is unlikely.

Harder to predict is how the patchwork of new sanctions – and/or the fear of as-yet-undefined ones – could lead indirectly to a de-facto moratorium on handling Russian oil, as companies take pre-emptive action to avoid getting ensnared by the regime coming down the line. There are already reports major buyers of Russian oil have been unable to secure finance from Western banks, according to Reuters, and Bloomberg said some oil tankers are avoiding loading Russian crudes.

The world of price reporting has also taken action. Platts said on Thursday it would pause using “any commodities loading or delivering in the Black Sea” in its assessment processes “due to uncertainty regarding the escalation of the Russia-Ukraine conflict”. This will disproportionately impact Platts’ CIF markets for the Mediterranean: the region took more than 45% of Black Sea refined products exports and 53% of crude in 2021, according to Kpler. Loadings and exports in the Baltic were not covered by the decision.

The prospect of new oil sanctions dropping out of the blue will leave a cloud of uncertainty over the market. Suppliers with Russian-origin crude or products on their books may be forced to offer ‘risk discounts’ to account for the prospect of a cargo becoming less merchantable if sanctions changed again. Securing access to non-Russian origins as a back-up delivery option in case a customer is unwilling or unable to receive Russian-origin material may also be a consideration. While the more risk averse may decide to avoid handling Russian molecules altogether. Those with hands-on experience of trading with Iran when President Trump imposed sanctions during his presidency may find themselves called on to help navigate a way through the fresh uncertainty.

Russian crudes feel the pinch  

Traders with Russian crudes appeared keen to offload cargoes in recent days. Differentials took a beating on 24 February: Urals crude traded at a $7/b discount to Dated Brent on a B/L+5 pricing basis, while ESPO was last heard trading at a $6/b premium to M3 Dubai, which is almost a dollar down from previous trades. By the London close on the same day, Urals was offered by Trafigura at an $11.60/b discount to Dated Brent – a record low.

There is a smaller impact on eastern grades due to Chinese refineries supporting demand. Traders familiar with the Chinese market think sanctions would have limited impact on Chinese buyers. “If there are sanctions on banks, etc. it will be harder for some companies to manage. But for Chinese buyers it’s not an issue,” said a trader.

A case in point are the cargoes of Iranian and Venezuelan crudes that flow into China: Kpler estimates these volumes at around 476,000 b/d in 2021.

Butane climbs above propane in Mideast Gulf on cargo shortage

A lack of spot cargoes has pushed Mideast Gulf butane prices above propane in recent weeks, as overall LPG production in the region is seen lower, Zulfadhli Kader writes. In the week starting 14 February, General Index assessed the C3 (Propane) vs C4 (Butane) swaps spread for FOB Middle East CP Cargoes at +US$0.25/MT. But the spread flipped into negative territory midweek as CP butane swaps overtook propane by the end of the week, General Index assessed the spread at minus US$11.25/MT, reflecting falling levels seen in the trading screens.

Middle East Propane Butane

Traders told General Index the rise in butane was down to supply shortages for FOB C4 cargoes. Kpler tanker tracking data shows Mideast Gulf exports falling in recent months: 1.318mn MT in Dec, 1.155mn MT in Jan, and Feb is currently estimated at 1.024mn MT.

When OPEC+ members gathered in early February, member countries agreed to maintain the additional 400,000 b/d of extra output per month. One source for butane is as a by-product from crude oil extraction. So  reports some OPEC+ producers are struggling to hit their allowances has led to concerns butane output could also be squeezed. Saudi Arabia, Russia and even Kuwait, OPEC+’ powerhouses, have also not made the necessary investments to be able to swiftly ramp up output. LPG refinery output in the Middle East is estimated by OilX at 243,000 b/d in February, down from 253,000 b/d on last month, and 12% under the five-year average.

General Index saw more bids than offers for physical butane the past week, an increase in activity on typical levels seen in the Asia trading window. The scarcity of butane cargoes was evidenced by bids and offers on the C3 vs C4 swaps moving lower as the spread wound the week up in negative territory wound up. In a similar vein, outright bids and offers for butane swaps rose past CP propane swap levels to drive the C4 shortage home in the Asian market.

Elsewhere, spot buying for delivered Far East cargoes was expected to see an uptick as China returned from the Lunar New Year holidays, but activity has remained low thus far. Nevertheless, traders are expecting the coming week to be more enlightening as to the state of the delivered North Asia LPG market. Although there are a few sellers around, General Index is seeing a lack of firm offers for CFR cargoes in H2 March, prodding the bids upwards. At the start of the week, bids were coming in at Far East March +US$18/MT. This continued increasing throughout the week, resulting in a trade completed at Far East March +US$23.5/MT on 18 Feb.

Chinese refiners snap up crude cargoes on strong cracking margins

It is well known that Chinese refineries took advantage of low oil prices in 2020 to fill up their crude inventories, Chen Ee Woon writes. When prices subsequently rose in 2021, large drawdowns were observed both from inventory estimates and from implied draws calculated using China’s National Bureau of Statistics data.

General Index, China Crude Stocks

However, drawdowns do not last forever, and there are signs that Chinese buyers are once again on the hunt for crude.

It is not immediately clear why now is an opportune moment for crude shopping. Amid geopolitical tensions and fundamental tightness, prices are the highest since 2014. The only thing going for refiners are cracking margins, which have been doing extremely well as of late. So well in fact, there are talks of refiners delaying the typical April maintenance season to cash in on the prevailing margins.

Chinese buyers have been heard aggressively procuring spot crude, partially contributing to sky high differentials seen across many Mideast grades. These refiners are mainly represented by Sinopec, a Chinese major with the largest refining presence.

In the Mideast Gulf, Sinopec swept up all four cargoes of Al Shaheen crude offered by QatarEnergies in its monthly tender. While in Northeast Asia, traders familiar with Russian grade ESPO said Sinopec was responsible for many of those purchases this month. Unipec was also heard to be in the mix.

Across the Atlantic, similar stories were heard regarding the purchase of Forties, Mars and Urals. But while Urals are trading at discounts due to geopolitical tensions, arbitrage economics do not favour the import of Mars and Forties right now. “Murban lands $2 cheaper than WTI, UZ lands $3.50 cheaper than Mars,” said a trader familiar with the arbitrage trade.

All this was not without warning though. Astute traders with access to the right information knew that China would be on the look out for crude and started preparations beforehand. “I think it’s fair to state that China is at bare-minimum…all eyes are on what happens in China after the Chinese New Year. There’s a feeling that some restocking will be required,” Vitol’s Head of Asia Mike Muller said at the start of the month.

European propane/naphtha spread moves below $-100/MT as US stocks fall further

Light ends have so far experienced a mixed February, Arran Brodie writes. The first half of the month had seen naphtha outperforming LPG. The physical propane-naphtha spread was consistently sitting below $-100/MT and physical butane had remained sub-parity to naphtha since late January. It hadn’t only been LPG struggling to keep pace with naphtha prices, the crack to crude peaked at +$4.68/b on 3 Feb and remained well above +$2.50/b for the following two weeks, a stark contrast to the consistently negative values in the second half of January.

This week beginning 21 Feb has seen naphtha prices continue to rise, albeit at a much slower rate than before. Naphtha large cargoes have weakened against crude, with the crack falling to $0.89/b on 23 February. Alongside this, the price of Propane NWE CIF Large Cargoes has started to climb, with the assessment of $837.25/MT on 24 Feb representing a 15% increase over two weeks. This has led to propane strengthening relative to naphtha, with the pronap climbing above $-100/MT for the first time since 2 February.

General Index, propane naptha

EIA stats for the week ending 18 February show a tenth consecutive week of falling US propane stocks, now sitting below their 5-year minimum at 38MMbbl.

On the other side of LPG, butane has not performed so well. The ratio of butane to naphtha continues to gradually fall, in turn leading to the spread between propane and butane decreasing.

Data from Kpler shows that butane imports into NWE this week lie at their lowest since 2014. Coupling this with OilX data showing LPG demand at the bottom of it’s 5-year range and LPG stocks comfortably above their 5-year average, it may be unsurprising that the price of butane is struggling against both naphtha and propane.  

Place your bets on US gasoline demand roulette as bumper summer awaits

I can give you 10 million reasons why you need to care about gasoline demand during peak summer US travel, Jeffrey Bair writes. Literally, that’s the number of barrels per day of gasoline that was being supplied to the market during a record period for US consumption briefly last summer.

General Index, US Gasoline Supplied

That’s right, gasoline demand hit a record during the pandemic. Chalk that up as a weirdness in an economy that has a lot of crazy things going on: Brent near $100 a barrel, supply chain madness, shortages of new and used cars. And it’s become hard to find good help.

When demand got to 10mn b/d for one week ending 2 July, 2021, it came post-Delta and pre-Omicron Covid-19 variants, and during a period that saw families hit the roads in their tens of thousands, heading toward the beach, the parks and the sunniest spots.

So is it going to happen again this summer?

I’m out of the prediction business forever. In a former life, I used to keep track of gasoline demand like a middle-aged parent watches the thermostat during a cold snap. But here is some context I can offer: Gasoline prices are shooting up, which should cut support for demand.

About 10 counties in California are already within a dime of average $5/gal gasoline, auto club AAA data shows. That state has set a record for the average price at $4.75/gal on 23 Feb and the question now turns to: Will the entire United States this year get to the record US average of $4.11/gal set in 2008?  

It’s within 75 cents of that right now and prices are, barring some unforeseen event, only going up until September. I’ve been tracking cash market gasoline here at General Index, and CBOB blendstock that is several steps removed from the pump – early in the production stream -- is inching up right now in line with seasonal norms.

General Index, CBOB

Monday afternoon should bring a bump in outright value of CBOB – the most shipped and most traded gasoline blendstock in the country – during the transition to summer-specification gasoline. The summer fuel is cleaner and is more expensive, so the transition favours the climb toward a record price – leading to more tamping down demand because of gasoline inflation.

I checked in on this with someone a lot smarter than myself: Zachary Rogers, director of refining and biofuels at Rapidan Energy Group. He says while a one-week spike in demand is always possible, Rapidan does not expect gasoline demand to average over 9 million barrels a day this year.

The 2021 average was 8.95mn b/d.“There could be some demand surges if Covid restrictions are permanently ended,” he said. “Weeklies (in demand data) are highly volatile and are an implied number tied to storage tanks, so it wouldn’t surprise me to see a record reading, but that doesn’t inherently imply a trend.”

US gasoline consumers led the world in the post-pandemic recovery. But tempting as it is, as more and more coronavirus restrictions are lifted, to predict new records being broken on the US highways, I am not willing to go there just yet. Or maybe ever.

A good prediction has 10 million mothers and fathers. Get it wrong, and you are out on the street in the cold, begging for gas money.

Virginia Bridgewater
Nakul Hirani, Energy Analyst
Jeffrey Baird, U.S. Refined Products Pricing Director
Jeffrey Bair, Pricing Director, Americas Refined Products
Virgini Bridgewater
Chen Ee Woon, Energy Analyst
Arran Brodie, Energy Analyst
Zulfadhli Kader, Energy Analyst
David Elward, Senior Pricing Analyst
David Elward, Senior Pricing Analyst
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