| | | Energy Weekly: Seasonality Should Support Crude But Market Is Impressively Weak
US August PSM shows new low for US-Europe Product trade.
3Q earnings bolster view of coming supply surge.
4 November 2013 ¦ 14 pages ir.citi.com
The oil markets in the US and Europe remain impressively weak. European margins
have gained little from turnarounds, and ongoing physical crude weakness indicates no
sign of any imminent ramp in throughput despite maintenance winding down. N Sea
weakness is particularly notable given the robust 40’s flows to Asia. Urals has improved
slightly, but this is mainly driven by lower export programs as refinery maintenance in
Russia drops into November and crude loadings to Europe look set to fall by ˜140 k-b/d.
Seasonality points to rising product demand into year-end. Coupled with continued
strength in Dubai this may be enough to stop the bears in their tracks. Bolstering this
view is CFTC data showing (through Oct 22nd) a significant pull back in non-commercial
net length across the oil complex (see charts 10 & 11), plus the ongoing strife in Libya
and much of the MENA region.
Prompt Brent spreads are flirting with contango. The big rebound in BFOE loadings
coupled with dismal refining margins explains much of this. The US continues to export
rising volumes of products and hence margin weakness to Europe, with the August PSM
data showing a new record high for net product flows from the US to Europe (see chart
5). The US PSM data showed crude production in August down 12 k-b/d m/m, but up an
impressive 1.2 m-b/d y/y. Combined gasoline and distillate demand was down 0.6% y/y.
Citi is expecting WTI to rally against Brent in the coming months, but there is no sign of
strength in the US market for now, with midland, WCS, Canadian syncrude, LLS and
Mars all trading weak. Refiners running down inventories into year-end for tax reasons
may already be starting to weigh on the market. Gulf coast crudes are expected to be the
lead indicator that the US market is cleaning up; there is no sign of that as yet.
Aside from improving sentiment towards Iran and the Nov 7-8 nuclear discussions, the
state of the MENA region remains turbulent. Libyan output has been cut again to just
˜250-k b/d, as recent closures at the Sharara field and Zawiya refinery add to offline
eastern barrels. Iraqi civilian deaths topped 1,000 for the 2nd straight month, MEND are
threatening increased violence in Nigeria and the trial of former Egyptian President Morsi
could trigger further clashes between supporters and the government.
3Q company reports indicate that non-OPEC supply growth continues apace. Efficiency
gains and improved drilling techniques continue to ramp up Bakken output, which should
continue backing out US imports, especially with a wider WTI-Brent and new rail
facilities. Supply growth outside North America looks robust. Iraq in particular looks
promising as Shell reported that Majnoon was producing above its target output whilst
Lukoil pumped the first oil from the West-Qurna 2 project. Basrah Loadings have ramped
up following October maintenance and are 0.3-m b/d higher m/m in November at 2.4-m
b/d. |
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