The global oil market is about to enter a new phase of uncharted territory, characterized by significant supply and demand-side risks. From our Global Webinar on 20 October, we distill the top questions on the minds of the market and offer our views below using Vortexa’s real-time cargo and freight analytics data. You may access the full webinar from the link here.
1. Are we short on oil or not?
David: Easy question, difficult answer! As of now both are true. We are definitely short on diesel. But we are also long in light distillates, and the global crude market has not been particularly tight over the recent months. But the crude market has benefitted from generous releases of US SPR barrels and a hike in OPEC production over the summer months.
Looking forward, there are a lot of factors heralding tightness on the crude side: 1) Russia is set to struggle placing all their crude and products, leading to run cuts at domestic refineries and ultimately crude production shut-ins. This is not necessarily a longer-term problem, but in the sanctions transition phase very likely to happen. 2) The world is short on oil production capacity, and part of the rationale behind OPEC cuts is to get some spare capacity room to act back. 3) US SPR draws cannot go on forever, as the more they are drawn the less cushion we have for future challenges. 4) China is likely to hike crude imports, albeit probably by much less than indicated and incentivised by the Chinese government.
The loss of Russian barrels and winter turmoils are likely to drive prices higher, leading to even more GDP and oil demand destruction. Also, refining-side adjustments (new capacity, higher runs, massive yield shifts to diesel) are set to curtail the diesel strength at some point in time, leading then to lower margins, run cuts and less crude demand. In conclusion, we are semi-short now, may well be very short over the coming months and will ultimately be long in 2023. The long-term trend, however, will remain short in supply leading to volatility, due to a consistent lack of investments in the oil industry.
2. How well is Europe positioned for winter this year?
Pam: Better than expected despite unplanned refinery outages. As we move into the autumn maintenance season in Europe and the US amid a low stock environment in both regions, we have been blindsided by unplanned refinery outages in France due to widespread strike action, decimating already low diesel inventories. France is even in more need for diesel to cover gas-to-oil switching, building upon its already established domestic heating oil market.
Fortunately, Europe has purchased more diesel supplies from the Middle East and Asia which is the growing alternative source to Russian barrels. Diesel imports from East of Suez hit a multi-year high in September with flows from Saudi Arabia alone reaching nearly 300kbd and diesel volumes from India reaching over 200kbd, the highest levels seen since January 2020. Although China could alleviate the global diesel tightness further if refineries boost runs and increase diesel exports, it is likely that these export barrels will stay in the region, freeing up barrels from India.
It is questionable if seaborne diesel exports from the East of Suez can continue at this level. Currently the soaring Asia diesel exports is partly driven by strong European demand which has driven up diesel cracks. Post winter, if diesel demand cools, we could expect Asian refiners to cut exports if margins fall, especially in lieu of the persistently weak naphtha and gasoline cracks.
3. What does trade data imply in terms of oil demand?
David: What is straight-forward is that naphtha has performed badly since March, while gasoline imports have plummeted in September in Asia and the Atlantic Basin, led by Europe. Inflation, curtailed government price subsidies and shrinking disposable income is forcing consumers to reduce driving or drive more efficiently. LPG is doing well as a replacement for naphtha, diesel and LNG – whoever can is using more of the (much) cheaper C3/4 molecules.
For diesel it is much more difficult to tell how well demand is actually doing. It is clear that a lot of players globally are buying much more diesel than usual. But is that for current consumption or for tertiary-level stock building (which is not reported in any inventory figures)? There are surely hot pockets of demand in the Southern Hemisphere, especially LatAm, Africa and Oceania. But given the massive price, at least relative to any other oil products, and the economic headwinds, it is fair to assume that a lot of saving and demand destruction is taking place. This, however, is counterbalanced by gas-to-diesel switching in power and industrial uses, as well as the use as back-up power generation fuel. A lot will depend on winter weather, especially in Europe, but ultimately supply (refinery runs and yield shifts) and demand forces will bring down diesel cracks.
4. To what extent will OPEC+ production cuts impact Asian refiners?
Serena: Although OPEC+ had announced a 2mbd production cut from its current targets, the real shortfall in supply is expected to be closer to 0.8 – 1.1mbd. Currently, Asia and Europe are the largest markets for OPEC+, importing 17.8mbd and 6.3mbd of its crude, respectively, so far this year. Between these two regions, OPEC+ is more likely to prioritise its crude supplies to Asia over Europe, given higher official selling prices (OSPs) to Asia and the need to fulfill its term contracts. While tighter crude supplies would give OPEC+ more bargaining power to raise prices, if overdone, it could drive Asian refiners to look for alternative supplies from the Atlantic Basin. Amidst growing economic headwinds, Asia’s oil demand is expected to slow and refineries could be looking to lower refinery runs especially after December. More price-sensitive refiners may also tap into their crude inventories and delay purchases.
5. Is US crude production growth a possibility and what does it mean for Europe?
Rohit: US producers, especially the majors and large publicly traded players who also happen to own the most prolific acreages have chosen to prioritize shareholder returns over investing in capex for new production. The producers who are willing to drill for new production are facing material and labor shortages. This means that US crude production will struggle to put additional barrels into the global market. Even though the US will be able to maintain the current export volumes to Europe, any additional barrels will only be likely later in 2023. Rough seas ahead for European buyers looking to replace Russian barrels.
6. What has replaced the Russian crude oil now shunned by much of Europe since the start of the war?
Jay: Since the start of the Russia-Ukraine war, the belief that Russian crude would always be a baseload for European refiners has been torn up. Russian origin crude flows to Europe (EU27 & UK) have dwindled away in recent months and in 1H Oct 2022 only constitute around 5% of the region’s seaborne imports. In a bid to replace Russian Urals, Europe is diversifying its slate by taking more crude from the Middle East and the Atlantic Basin. The largest change we see is in a sharp increase in Middle East origin crude (Iraqi and Saudi grades), but Libya, Brazil and the US have also been supplying more to Europe too. The desire to displace even Russian piped crude by some northwest European refiners means European seaborne crude imports are now above pre-war levels.
These structural changes in volumes and source of supply are not going to reverse anytime soon. Looking ahead, the OPEC+ announcement for a “2mbd production cut target” will make crude procurement for European refiners trickier, especially given lackluster growth from the US and rising competition from Asia. This could intensify further still given the looming 5 December insurance and services ban related to Russian oil, along with the ongoing uncertainty over a yet to be finalised Russian oil price cap.
7. Which countries are stepping up to pick up the slack in Russia’s fuel oil supply?
Roslan: For several months now, it has become clear that the world’s top fuel oil exporter is sending its residual cargoes eastward to markets in the Middle East and Asia. To a lesser extent, Egypt in the African continent has also emerged as a sort of ‘transit point’ for Russian fuel oil exports heading further east.
Imports into the Middle East took off significantly soon after the invasion of Ukraine, peaking at a record 210kbd in August, but have since cooled in line with the slowdown in seasonal power generation led fuel oil consumption in the Arab Gulf region. Meanwhile, imports into Asia have been steadily ramping up since the end of the second quarter to set fresh record-highs of 600kbd so far this month, preliminary data shows. Within Asia, the bunkering and fuel oil trading hub Singapore unsurprisingly accounts for the largest share of Russian inflows into Asia, followed by other regional demand centers including China and India. Ultimately, these volumes are used to meet demand from the bunkering, power generation and refining sectors.
8. How much clean products will China export in November and December?
Emma: Last month, China issued a new batch of 13-14mt of product export quotas to state-owned refiners that is likely valid till the end of March 2023. The move was aimed at encouraging refiners to boost refining runs and exports, although the refiners still had 7-8mt unused 2022 quotas at the end of the month. This means that China may increase exports to 5-6mt per month in the last three months of the year.
However, our flows data indicate that China is on track to export around 3mt of fuel (mainly diesel and gasoline) in October, already a 13-month high but below the allowed amount, and they may not be able to boost exports much in the near term as refiners have been slow in boosting refining runs. China has also required its oil majors to secure domestic diesel supplies over winter. Its diesel production (from NBS) and diesel exports (from our flows data) in September and October suggest that the inventory level is not high and refiners may need to cut back exports in November, and may increase shipments again in December if they ramp up production.
9. What is the current health of freight markets, and what lies ahead for them going forward?
Dylan: On the dirty tanker market, we see relative strength in crude tanker rates, mainly due to expectations that China will ramp up crude imports, uncertainty around the fleet as sanctions on Russia loom and increased mileage as Atlantic Basin to Asia flows increase. Going forward, with the OPEC production cuts and global economic concerns, the demand outlook is bleak and we could see a downward correction in freight rates as we head into 2023.
For the clean tanker market, we are already seeing a correction in rates, despite the strength in diesel. Weakness in light distillate markets and high availability in Atlantic/Pacific MR tanker markets has weighed on overall clean rates. With some pockets of increased demand expected on jet and gasoline trade routes over the holiday season, we may see some more support for clean rates, although this is likely to be short-lived. More medium-term demand prospects and refinery adjustments do not look promising for clean tankers heading into next year.