A weekly look at what occurred in the oil markets of the U.S. and the world this past week.
--There’s so much focus on the IMO2020 rule in the transport sector, as companies start to realize that diverting that much distillate into the marine market could tighten supplies for their own needs. A more pressing switch began occurring this week, when Mexico started requiring ultra low sulfur diesel—with 15 parts per million sulfur—for all diesel use in that country. The expectation, according to news reports, is that it will add about 150,000 to 180,000 barrels/day of ULSD demand. There had been hints that Mexico might delay the rule but it chose to go ahead with it. Most of that new supply to meet the demand, if not all of it, is going to come from the U.S. which already supplies more than anywhere between 250,000 to 300,000 b/d of diesel to Mexico. That country’s battered refining sector does not have the capability to meet its own needs. Distillate inventories in the U.S. have been running tight, even with refineries operating at 95% of more of capacity. But the weekly American Petroleum Institute and Energy Information Administration inventory reports this past week showed big builds in those stocks. Given the sudden new customer south of the border, they’re going to be needed.
--OPEC is already making cuts, according to two news agencies doing their monthly survey of the group’s output. Both Reuters and Bloomberg came out with reports that estimated OPEC reduced its output by an amount on either side of 500,000 b/d. Some of that drop in production came from a shutdown in a big Libyan field, which took a little more than 100,000 b/d off the market, and Iranian cutbacks due to the U.S. sanctions that have so many holes in them that the reductions from Tehran are nowhere near what had been expected. The cuts OPEC agreed to totaled 800,000 b/d, to start this month, but clearly, they’re already on their way to making those reductions.
--Saudi Arabia prices its oil as a differential to key benchmarks. For example, in its sales to U.S. customers, each month state oil company Saudi Aramco sets a differential for its four key grades for its sales into the U.S. against a price benchmark set by Petroleum Argus known as ASCI, for Argus Sour Crude Index. (It uses different benchmarks in other parts of the world). Where it sets those differentials is closely watched by analysts, because they provide signs of what the Saudis are thinking. Does Aramco think the market for its heavier oil is strong or weak? How much it raises or cut the differential offers up a clue. Does it want to sell more oil into Asia? Maybe they signal that through where they set differentials. For February, the Saudis set their benchmark crude Arab Light in the U.S. at a $3.05 premium to the ASCI benchmark. That is a 15 cts increase, which doesn’t sound like much. But it’s being viewed by traders as confirmation the Saudis don’t plan on selling a lot of crude to the U.S., pushed out in part by U.S. production and continuing tensions between the two countries over a variety of issues. The other Saudi grades were moved even higher. According to one report, this is only the fourth time the Arab Light differential into the U.S. has been more than $3.
--Years ago, news that Saudi Arabia was going to cut its supplies to the U.S. might have been cause for concern. That it isn’t could be fully earlier in the week when the Energy Information Administration released its monthly statistical report. There’s a two-month lag on the report so the latest is for October. The net import number is obtained by adding up total petroleum imports—which includes crude, products such as gasoline and diesel, LPGs like propane and several other smaller categories—and subtracting out the exports. The report said that in October, U.S. net petroleum imports were 1.399 million barrels/day That figure was about 800,000 b/d less than in September. To get a handle on how much things have changed, the all-time high number was in August 2006 at 13.4 million b/d. That’s a decline of about 90% over 12+ years. But out of that 1.399 million b/d, net imports from Canada were about 3.1 million b/d. Take those out and the U.S. can fairly be called a net exporter for all practical purposes given that the U.S. and Canadian industries, to a large degree, are physically linked together by pipelines. The U.S. still did import 9.4 million b/d of crude in October. But 3.6 million b/d of that came from Canada and the Saudi exports to the U.S. were only a bit more than 1 million b/d. The U.S. exported 2.3 million b/d of crude in October. The bottom line is that while the Saudi move to reduce exports of crude to the U.S. is interesting, its impact can be easily compensated for by the shifting of other barrels.
--Prices during the week trended higher. As predicted by some analysts, the hedging-driven selling that pushed prices down at a faster rate than the decline in equity markets prior to Christmas ran its course for the January WTI contract on CME. With that mostly out of the market, prices rebounded. This occurred even though most news was bearish. The reduction in OPEC supply was about the only bullish news out there. Otherwise, the news included signs of weaker growth reflected in Apple's warnings on Chinese iPhone sales, and reports of enormous growth in product inventories in the U.S. Still, between the settlement of Friday December 28 and January 4, WTI prices rose to a $48.14 settle from a December 28 settle of $45.33. Since the recent low posted Christmas Eve, WTI prices have tacked on about $7.50/barrel, and ULSD has added about 11 cts/gallon.