On Sunday, a joint committee that includes OPEC members and non-OPEC nations will meet in Jeddah, Saudi Arabia to take a look at oil markets. This committee, known as the Joint Ministerial Monitoring Committee (JMMC) has only been around a few years. It might never have held a more important meeting than this one…unless it was the prior one.
That’s because OPEC and some of its non-OPEC fellow oil exporters will be meeting next month to decide what to do after their six-month round of production cuts expires. The cuts were announced in early December 2018; prices plummeted until Christmas Eve (to be fair, so did most financial markets), but since then the price of oil has staged a remarkable comeback. As measured by the price on CME, ultra low sulfur diesel (ULSD) has been the weakest performer, rising 27.7 percent. But RBOB gasoline is up 63.6 percent, Brent crude is up 43.8 percent and WTI crude is up 47.3 percent.
It has been a market that since the start of the year has seen significant cuts in supply. They’ve come not just from OPEC – OPEC output in April, according to S&P Global Platts was 30.26 million barrels per day (b/d), down from 33.08 million b/d in November, the high-water mark – but has also seen Russia not really cut what it said it was going to reduce and the Canadian province of Alberta implement its own government-mandated cutbacks. OPEC’s reductions have been propelled not only by Saudi reductions but by renewed sanctions against Iran and more turmoil in Venezuela and Libya. (And Nigeria. There are always problems in Nigeria. The only thing that changes are the details at any given time.)
As the JMMC meets, most of the data it will look at probably should be seen as supporting the idea that OPEC should hold the line. You can see that in some of the data released this past week by both OPEC itself and the International Energy Agency (IEA). Here are some of the key points:
– That Platts figure of 30.26 million b/d is less than what OPEC projects the market needs in three of the four quarters of 2019 to fill the gap between what the non-OPEC world is producing and what demand is. That means that OPEC production, if it held steady, would be less than the model for the amount of OPEC oil that the world will demand. That figure on the difference for the first three quarters of the year between global demand and non-OPEC supply is 30.44/30.95/31.2 million b/d. Only in the fourth quarter of this year does the April OPEC production as estimated by Platts exceed the group’s estimate on what OPEC demand will be in that particular quarter.
– If the current level of output as estimated by Platts is less than what the market needs, doesn’t that raise the prospect of prices starting to climb toward even higher levels, possibly damaging the world economy? OPEC doesn’t embrace higher prices at all times; it is concerned that if they get too high, it spurs the development of alternatives and destroys demand. OPEC’s estimate is that the world needs, on average, 30.58 million b/d of its crude for all of 2019. Its output, based on Platts, is less than that.
– But OPEC doesn’t just look at the balance between supply and demand. It also looks at inventories. And based on the recent OPEC monthly report, they still might be viewed as a little excessive. According to the OPEC monthly, stocks in OECD nations March went up, which is not the norm during the first quarter. Inventories also were higher than last year and were also more than the five-year average. By another estimate, stocks as measured in “days cover” – the number of days of demand the inventories could supply if you drew 100 percent from stocks – were a little less than the five-year average.
An overly simplistic conclusion could be that the meeting in Jeddah, followed by the full OPEC meeting on June 26 in Vienna, will look at that data – and much more of it – and conclude that supply and demand are equal and that inventories if anything might be a little high. Given that by the fourth quarter, rising non-OPEC oil production is going to mean that the need for OPEC oil is going to diminish – the fourth quarter OPEC estimate on what it needs to produce is 29.74 million b/d, well below current levels – no significant change in the group’s current policy is likely.
The IEA, which is a group of major consuming nations, observed markets through much the same prism. Inventories were a bit excessive but are heading down, the IEA said in releasing its own report this week. The first quarter supply/demand balance was a surplus of about 700,000 b/d of supply over demand in the first quarter, but “(a)s we move through 2Q19, while there is considerable uncertainty on the supply side, it is highly likely that the implied balance will flip into an indicative deficit of about the same size,” the IEA said.
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Oil companies have been producing and marketing a new blend of fuel oil for the marine industry to comply with the lower sulfur requirements of IMO2020, which goes into effect January 1. The product is known as very low sulfur fuel oil (VLSFO) and it would replace high sulfur fuel oil.
The relevance of this product to the transport sector is two-fold. First, to make the compliant fuel, an intermediate product known as vacuum gasoil (VGO) is blended into the VLSFO. VGO is a distillate product and is used to make over-the-road diesel. A diversion of VGO into the marine fuel market – where it was not blended into HSFO previously – creates some of the new diesel demand that is expected to be spurred by IMO 2020.
The second key point is that a lot of shipowners are worried about the performance of VLSFO. It’s not that they have found a flaw in the blending process. It’s just that it’s something different. So multiple shipowners have said that yes, they’ll test VLSFO but they don’t want to use it right away. Somebody else can go first. This was very much on display at a recent conference. That course of action is seen as the worst possible option for consumers of over-the-road diesel because the extra demand on the diesel pool will probably be greater from that strategy than the production of VLSFO and its use of VGO as a feedstock.
This past week, Shell said it had completed 19 successful trials of VLSFO at various unidentified ports. It made that disclosure in a press release in which it said it was offering further trials at other places, including the key facilities of New Orleans, Rotterdam and Singapore. In the tests that have taken place, “the fuels performed well in the engine, crews were comfortable using them and changeovers between grades did not result in any extra workload for the engine crew,” Shell said in its statement.
Greater use and adoption of VLSFO, whether it’s made by Shell, ExxonMobil or anybody, is good news for the trucking sector.