Oil – Low Refining Margins Offset By Tight Crude Supplies

Welcome to the global crude edition of Oil Markets Daily!

Refining margins are getting obliterated. Tanker rates shot up again last week and refinery run cuts are now expected. So the question becomes, why are physical crude spreads so tight?

Brent 1-2

Refining Margins

Source: Energy Aspects

We have a few theories as to why this is happening and Energy Aspect had a theory as well.

  1. Refineries are limited by how much they can cut throughput as local product supplies are tight.
  2. Drop in refining margins is related to higher tanker rates, not outright higher crude prices.
  3. Lower OPEC exports globally and lower global oil-on-water have kept crude supplies very tight.

EA stated in today’s weekly report that outright refinery run cut should have started, but due to constraints, the estimated run cut has only been ~300k b/d, which is puny.

Our take is that global crude is very tight and hence another reason why physical timespreads refuse to sell-off.

We think this is also largely contributable to OPEC exports being ~4 mb/d lower y-o-y. You can see that last November saw the Saudis spike exports to ~8.3 mb/d to placate Trump. This year? It is at ~6.7 mb/d for Nov.

In addition, it appears Iraqi exports are being impacted by the recent protests with exports falling ~200k b/d m-o-m.

Iraqi exports this year have also disappointed to the downside as you can see in the chart above.

Finally, when you put the lower export figures together, you get lower oil-on-water.

Which we think is the main cause for the backwardated timespreads in global crude.

This, of course, is bullish for crude, but we will need to see the timespreads continue to hold-up as refinery throughput increases.

Source: Energy Aspects

Global CDU outages are expected to drop another ~4.3 mb/d by next month, so this increase in demand will quickly hit global crude storages.

As for global oil inventories, the overall trend has been supportive.

We are now below last year’s levels according to the high-frequency weekly reports.

But for oil watchers, the drop in refining margin is of concern, so we will be watching the physical spreads closely.

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Disclosure: I am/we are long UWT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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