28 January 2022

Brent rally over US$91/b stalls after investors expect US Fed to curb inflation

A bullish supply outlook, at least in the short term, has continued to drive oil prices to new peaks. Brent futures breached $91/b for the first time since 2014 this week. But the market struggled to sustain these levels. Expectations the US Federal Reserve will tighten monetary policy to tackle inflation is a bullish factor for the US dollar, and contributed to the price falling back below $90/b.

General Index Dated Brent crossed $92/b on 26 January, a 5% increase on the weekly low recorded Monday. General Index Dubai Partials (M1) reached $87.77/b on Thursday, while in the US, WTI futures hit a new seven-year high of $88.54/b. Worries about an impending conflict between Russia and Ukraine remained a key geopolitical risk factor. At a time when OPEC+ is struggling to meet its own production targets, fears of sanctions affecting supply from the world’s second-largest crude exporter has been a potent force to ignite prices even if consensus reports tends to think oil flows would be unaffected.

Earlier this week, US President Biden announced he could place sanctions on President Putin personally if tensions escalated. The US also rebuffed Russia’s demands for NATO to withdraw troops from Eastern Europe and rule out Ukraine joining the organisation. Despite the ratcheting up of rhetoric, Goldman Sachs and other observers said while Russia could use natural gas exports to Europe as a bargaining chip, oil flows were less likely to be disrupted.In the Mideast Gulf, the UAE intercepted two ballistic missiles fired by Yemeni Houthi rebels at Abu Dhabi on Monday.

This is just the latest episode in the ongoing regional conflict which, in contrast to the situation in Europe currently, poses a more serious risk to the oil supply chain in the event of a successful attack on the Gulf producers.

In more bearish news, on Wednesday the US Federal Reserve made it clear that interest rates would soon rise, as they attempt to regain control of inflation. This news boosted the strength of the US dollar, with the USD:GBP exchange rate rising 5 basis points overnight. During this time, crude prices declined, with Brent futures falling back below $90/b, as investors moved away from risky assets such as commodities.

This week’s US EIA report was met with a mixed reception. Total crude stocks increased by 1.1mn bl and gasoline was up by 1.3mn bl in the week to 21 January, in what would appear to be bearish signals. However, crude stocks in Cushing once again fell, which, when partnered with continuing large draws in propane and diesel/gasoil stocks well below year-earlier levels provides encouragement for the bulls.

Elsewhere, product demand is set to be tested in China over the coming Lunar New Year as the country sticks to its zero-Covid policy. Some 1.18bn passenger trips are expected over the holiday period. While this would be 60% lower than 2019, BloombergNEF predicts jet fuel demand will reach its highest level since August.

Dangote’s game-changing refinery in Nigeria edges closer to completion

More details have emerged about the start-up later this year of Africa’s soon-to-be largest refinery. Saket Vemprala considers how Dangote’s 650,000 b/d refinery in Nigeria is expected to significantly affect crude and clean product trade flows in the Atlantic Basin.

‍Nigeria’s long-awaited new Dangote oil refinery could start processing crude in Q3 this year with utilisation ramping up to close to capacity as soon as Q1 2023, according to news agencies this week, quoting Aliko Dangote, the head of the eponymous conglomerate developing the refinery. Mechanical work on the refinery is complete and initial crude runs are expected to start around August-September this year, Nigerian media quoted Dangote as saying. “Full” production could start by Q4 2022 or Q1 2023.

The refinery has a nameplate capacity of 650,000 b/d, but will initially process around 540,000 b/d, according to comments made by Dangote. The plant is located in the Lekki free zone, just outside Nigeria’s capital Lagos.

Nigeria's poor track record in refining

Despite its status as one of Africa’s largest crude exporters, Nigeria’s refineries have been in a parlous state for years due to underinvestment, resulting in a heavy dependence on refined product imports to meet its domestic needs. Nigeria has around 450,000 b/d of nameplate refining capacity – across three plants operated by state-run NNPC – but actual utilisation has long been at a small fraction of this official total. In fact, during 2020, Nigerian refinery throughput fell to zero, according to official NNPC data.

In the year to April 2021, the period for which official data is available, NNPC supplied around 300,000 b/d of imported gasoline to the domestic market, as no homegrown supply was available.

Europe's gasoline sellers to suffer most from Dangote's arrival

For Northwest European (NWE) gasoline sellers, West Africa has been a reliable destination in recent years. A little under one-third of gasoline exports landed here in 2021. Dangote’s start-up is expected to severely crimp this trade and could sound the death knell for refiners unable to find alternative outlets for their product. Our friends at OilX estimate that Nigerian gasoline imports will fall by two-thirds to around 100,000-150,000 b/d by 2023.

Nigerian gasoline imports averaged around 350,000 b/d during 2021, with Northwest Europe accounting for the lion’s share of origins, according to Kpler data. NWE exports to Nigeria averaged 266,000 b/d last year, 22% of its total exports. Refiners in Europe are already under pressure from a rising tide of environmental regulatory costs, supply flooding the market from the Middle East and falling domestic demand as consumers transition away from oil.

Wood Mackenzie thinks Dangote will have “profound effects” on the Atlantic Basin gasoline market and reduce the utilisation of European refiners. After the start-up of Dangote, Nigerian gasoline imports could continue falling towards zero, pending the ongoing rehabilitation of Nigeria’s existing state-run refineries. OilX modelling suggests Dangote’s gasoline output as a share of Nigerian demand could rise from 35% to 68% during 2022-2024, while all of Nigeria’s diesel/gasoil and jet/kerosene consumption could be sated from this single refinery within the next year.Nigeria’s net short position on clean products – particularly gasoline – has long been a profitable Atlantic Basin trade, regularly drawing in barrels not only from Europe and the US, but also from the East of Suez as well. Consequently, barring increased gasoline consumption in other importing regions, the initial start-up and later ramp-up of Dangote could put pressure on both NWE gasoline cracks.

WoodMac says: “The recovery in European net cash margins is limited by the challenges of reduced gasoline exports whilst facing additional burdens of the high costs of natural gas and carbon emissions.”

‍Shift in freight and crude dynamics predicted

‍Demand for Medium Range (MR) and Long Range (LR) tankers could also take a hit; however, the possibility of Nigeria exporting middle distillates from its new refinery could offset the LR impact. Another consequence could be reduced trading interest in the end-of-day pricing window for 95 Ron NWE gasoline barges.

This assessed spot price is used by Nigeria in its products pricing template, and NWE barge traded volumes in the window are often seen as a barometer of cargo export interest to the Nigerian market.

One last thought: as more Nigerian crude is consumed domestically, reduced exports will support Nigerian crude differentials to Brent, as well as helping to support the sweet-sour spread wider.

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US jet fuel slides on hike in supply, stocks amid slow intercontinental travel recovery

‍A surge of jet fuel in supply depots serving New York has cut support for the commodity across most of the US, with the fuel briefly dipping to hefty discounts to diesel not seen in weeks, writes Jeffrey Bair.

Since 17 Dec, 2021, the four-week average for jet stockpiles on the East Coast has increased 7.6% to nearly 8.6 million barrels, US data show. The market takes jet fuel for major fields such as JFK in New York, Hartsfield in Atlanta and BWI near D.C, and the regional total represents about 25% of total US supply.

OilX said in a note this week that US jet yields have been increasing since last summer with “volumes being pulled away from other fuels towards jet production. ”The shift was acute this week in physical markets. Colonial Pipeline jet fuel dipped Monday to a 14-cent/gallon discount to physical diesel and a 22-cent discount to Nymex ULSD futures. Shell and Phillips 66 were seen to sell large quantities of Jet A1 for sale, with BP and Gunvor as primary buyers in that period. Jet fuel rebounded the next day to levels more typical for the last few months. But the lack of footing underscores how shaky the aviation markets have been.

US demand for the fuel has been moribund because of domestic and international travel slumps, with the moving average for jet fuel supplied, a proxy for demand, unable to break through a ceiling of 1.8 million barrels a day since December 2019.A jolt of support for jet could be just ahead. A jet fuel-focused unit at the Delta-owned refinery in Pennsylvania is expected to undergo maintenance starting in mid-February.

Asia LPG rallies on record demand, tight supply at start of 2022

LPG markets in Asia have rallied this month on strong demand and a shortage of supply, writes Zulfadhli Kader. General Index Far East CFR Propane Cargoes have been in the high $700s/MT for all three half-monthly windows (H1 Feb, H2 Feb, H1 Mar) which make up the index.

OilX estimates Asia LPG demand will exceed 5mn b/d in January for the second consecutive month, having passed this key milestone for the first time at the end of 2021. Consumption this month of 5.062mn b/d compares to 4.75mn b/d a year earlier and the five-year average of 4.45mn b/d.

In the first two weeks of the year, numerous bids were seen, but General Index heard no offers. Fears Omicron would see prices fall had deterred buying interest in December; but since the start of the year, as those concerns diminished and global oil prices climbed higher again, several physical bids were heard in the region of Far East Feb+$15/MT.In this same period, General Index heard no offers, as most orders had been placed ahead of the festive period and suppliers were working through the backlog.

The imposition of Covid-19 lockdown regulations in many countries also slowed shipping activity through the region’s ports. The following week of 17 Jan, fewer bids were heard, but the differential still hovered around Far East Feb+ $15/MT. Offers were now heard at Far East Feb+ $27/MT. Cargoes were becoming available as winter heating demand receded in Northern Asian. But any bearish effects appeared to be offset by buying interest instead coming from petrochemical makers who were shifting to propane as an alternative feedstock to naphtha for their steam crackers.

LPG prices are expected to remain strong until after the Lunar New Year next week, as regional buyers competes with Europe and Latin America for US cargoes.

NWE pronap spread weakens on lackluster propane, stronger naphtha demand

The discount of propane cargoes in Northwest Europe to naphtha – the so-called ‘pronap’ spread –surpassed $100/MT this week on firming naphtha demand and relatively balanced propane fundamentals, write Arran Brodie. The closely-tracked ‘pronap’ spread was assessed by General Index at US$-101.00/MT on 26 Jan, down $45.25/MT in just over a week to move to the widest discount since we launched LPG pricing in June 2021.

LPG pricing has been relatively stable so far this year. General Index Propane NWE CIF Large Cargoes have largely held around $690/MT, except from a brief rally to $730/MT on 12 Jan. Propane and butane have both struggled to match the price increases seen on naphtha. General Index Naphtha NWE CIF Cargoes are up more than $70/MT this month. Prices were supported in recent days by an uptick in physical spot market activity.

Trafigura bought a number of cargoes for mid-February delivery in the daily pricing window. The naphtha crack spread to crude rose to $-0.57/MT on 25 Jan from $-1.00/MT a week earlier, before slipping back a touch. By contrast, a recurring Equinor bid on the propane large cargoes window has remained unlifted, epitomising a relatively sluggish pace to the LPG market.

Propane CIF NWE Cargoes fell to a $5/MT discount to the February swap on Wednesday, from a $4.25/MT premium a week before.Butane has also weakened versus naphtha. The butane-naphtha ratio is down 3% to 99% over the past week, following a period of no activity in the spot pricing window.

Most of February’s buying has apparently been completed already and local butane supply will be sufficient to meet any incremental demand. The reopening of the arbitrage from the US it yet to stimulate much buying interest; however, it is likely that, with butane at sub-parity, we will see petchem demand increasing in the near future. In the meantime, if this is not forthcoming further decreases in the butane-naphtha ratio could be expected.