Analytics

Column: Prolonged OPEC+ output cuts will confirm bearish outlook – Russell

What a difference a month can make for markets trying to guess which way the OPEC+ group of oil exporting nations will take their output policy.

Source: Reuters, by Clyde Russell

A month ago, the broader market largely expected the group, made up of OPEC and key allies including Russia, to increase crude production to cool sharply rising oil prices.

Instead, the group held its output cuts at around 7 million barrels per day (bpd) for another month, extending them into April.

The market’s surprise was compounded by what was probably its incorrect reading of the move and subsequent price action.

Prices rose after the OPEC+ output cut extension bolstered views that tightened supply would be bullish with the global economic recovery expected to support demand.

The missing link in the market’s equation was that an uptick in demand was just a projection, and not yet a reality, and that there was still plenty of crude available.

The situation for Thursday’s meeting of OPEC+ hasn’t really changed much in a month, with current demand still soft and refiners not competing hard to secure cargoes.

In the top oil-consuming and importing region of Asia, most refiners will have already completed their May loading programmes and will be working on June and even July.

This means that OPEC+ producers will be well aware of how much crude is sought, and it’s likely to be much the same as demand in March and April.

Ahead of the OPEC+ meeting on Thursday, the market now expects the output cuts to be rolled over for May, and this time it will likely be interpreted as a bearish demand signal.

What happened in the oil market around the previous OPEC+ meeting on March 5 was a mismatch of expectations, reflected in bullish prices in the paper crude market, and the reality of weak refiner demand and producers’ unsold cargoes.

The paper market may be correct that demand will recover, but it’s now likely to be in the second half of the year, as many countries continue to battle outbreaks of the coronavirus and uneven vaccine rollouts across the globe.

Brent crude futures reached a 14-month intraday high of $71.38 on March 8, in the wake of the OPEC+ decision to roll over output cuts for April, but have since retreated to trade around $63.53 in early Asian trade on Thursday.

The decline of around 11% brings the global benchmark futures contract more into line with the signals from the physical market, where traders report no shortage of available crude and refiners, especially in Asia, shop around for cheaper supplies than those offered by OPEC+.

STEADY ASIA IMPORTS

Asia’s crude imports are forecast by Refinitiv Oil Research to be around 25.2 million bpd in March, down from February’s 25.75 million bpd, but up from January’s 24.58 million bpd.

Top consumer China is expected to import 11.42 million bpd in March, down slightly from 11.65 million bpd in February, while number two India is forecast to buy 4.16 million bpd, a marginal increase from February’s 4.10 million bpd.

Overall, the message from the physical market in Asia is that demand ex-China is up from the pandemic lows of last year, but still behind pre-pandemic levels.

The region’s refiners still face weak margins, a factor that is unlikely to spur higher crude purchases.

The profit drivers have also swung around, with refiners making more money from gasoline than diesel, a sign that demand in the key industrial sector remains soft, even as light vehicle transport recovers.

The crack, or profit, from making a barrel of Brent crude into gasoline in Singapore rose to $7.12 on Wednesday, the highest since February last year.

However, the crack for producing a barrel of gasoil with 10 parts per million sulphur, the building block for diesel and jet fuel, ended at $4.76 on Wednesday, up slightly from the previous day’s four-month low of $4.71.

While gasoline margins have returned to around the pre-pandemic levels seen in much of 2019, the gasoil crack is still well below the 2019 range of $12-$20 a barrel, reflecting ongoing weakness in both jet fuel and diesel demand.

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