TOCOM Energy

Oil prices got off to a weak start to the year as economic concern grew further, with the IMF forecasting a third of the world’s economies could sink into recession this year.

Intermonth spreads of major crude oil benchmarks drifted lower last week with NYMEX WTI M1/M3 spread hovering around two year lows while JPX Dubai has shown some resilience.

M1/M3 spread of NYMEX WTI have flipped between positive and negative since mid November, leaving the narrowest spread since the start of 2021 on Friday. Furthermore, spreads for the first half of 2023 crashed into contango, with the front month to June contract showing a negative structure on Friday amid an expected continued slide in US refinery demand recently.

U.S. refineries are usually destocking at the end of the year when oil prices rise year on year, because they need to keep inventories of raw materials as low as possible by the end of the year to make their earnings look better according to accounting rules. Refinery buying interest is expected to come back sometime before Feb.

The EIA data reported that U.S. crude inventories rose by 1.7 million barrels for the week ended Dec. 30 in large part due to the refinery shutdowns amid freezing temperatures from the week prior. We will probably see an uptick in refinery runs next week as the largest crude oil refinery in the United States returned to production.

was also likely blunted by continuing strong exports supported by healthy arbitrage economics for flows to Europe.

According to S&P Global, European refiners turned to crude grades from Norway, the US, Saudi Arabia in 2022 to plug the growing gap left by Russian imports. Among these grade, flows of US’ light, sweet WTI crude were the next biggest stand-ins for Russian barrels, adding almost 200,000 b/d on balance between the WTI and WTI Midland loading exports.

The front month and third month spread of ICE Brent also dipped as the European crude oil market is looking better supplied in the near term and risks are likely skewed to the oil product side.

Data from Vortexa shows that Europe’s imports of diesel and gasoil from the United States is on track to reach a two-year high this month, while In December, Europe’s U.S. loadings for diesel and gasoil reached 660,000t, it was the highest amount headed to Europe in any month since September 2020.

The EIA data also showed a decline of 1.4 million barrels for distillates due to lower refinery runs. Now US distillate inventories stand around 7% below the five year average. For the United States, the increasing European imports have collided with falling refinery supplies.

Prior to Russia’s invasion of Ukraine, the U.S. was importing nearly 700,000 barrels per day (BPD) of petroleum from Russia. Most of those imports were finished products and refinery inputs that boosted distillate supplies in the U.S. The loss of those Russian imports have caused problems for refineries as they struggle to fill holes in their product slates.

From 5 February all remaining imports of Russian oil products must be halted in the EU as part of sanctions. The competition for non-Russian diesel barrels will be fierce. It’s expected that Atlantic basin diesel markets will be tight until this summer, with refiners running at or near full capacity for months.

On the market east of the Suez Canal, China has increased its fuel export quotas by as much as 46% for the first batch of 2023 allocations compared to the first batch of 2022. The latest batch of fuel export quotas signals China’s willingness to continue supporting refinery throughput and capturing good refining margins in Asia.

To sum up, we expect the global refining industry will likely shift near-term production towards middle distillates to capitalize on high crack spreads for diesel and jet fuel driven by inventory shortages at key international hubs. Crack spreads should gradually move closer to normalized levels during the second half of this year as a result, however, a rapid increase in middle distillate inventories to historical averages is unlikely given the size of the current gap.

Inter-market price spread have shown a similar trend as incremental demand shift eastwards. The Brent-Dubai spread widened sharply in 2022 as the Russian-Ukraine war in February boosted Brent prices. The Brent-Dubai spread is likely to narrow this year as refineries coming on stream in Asia-Pacific and the Mideast Gulf will run on a diet of predominantly medium and heavy sour crude, while supplies may tighten if Opec+ keeps cutting production which could underpin Dubai prices.