TOCOM Energy

Tightening crude oil market may squeeze refining margins

Wu Hai

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March 29, 2024 5 min read

Dubai crude oil futures were climbing higher and consolidated close to 2024 high at the start of the week on reports that Russia was set to rein in second quarter production to meet its supply cut target. It’s calculated that production would drop to almost 9 million bpd in June or another 0.4 million bpd if the country proceeds with the planned production cut. We expect that the extension of the OPEC+ production cuts will tighten global oil markets in the second Q2. It also remains to be seen how strictly the latest round of voluntary OPEC+ production cuts are adhered to which has the potential to add additional oil supplies back on the market and lessen the expected tightness in near-term oil market balances and the corresponding upward pressure on oil prices.

Global diesel margins however has continued to slump. Unlike last year, the US and Asian diesel market are now facing supply glut and competing for lower prices to squeeze more surplus barrels out of the region. Singapore’s diesel market has remained on a downward trajectory since early February, a trend that persisted throughout last week. In the US, increasing crude runs contrast with persistently low diesel demand, currently at 5-year lows.

As arbitrage window remain open to Europe from both US and Asia offset supply fears, European diesel cracks shed $3/b over the course of last week to leave cracks for low sulphur diesel at a fresh two-month low. Looking ahead, increasing supply and poor demand leads to a bearish view on diesel globally, while it will be important to monitor the continuing effect of the Russian refinery drone strikes.

On the contrary, global gasoline crack spread continue to move higher, making them the best performing cracks in the barrel. The strength in gasoline market is led by US market, supported by dwindling US gasoline stockpiles driven by the turnarounds. Rising crack spread is also a reflection of the annual switch to a higher grade of gasoline known as the summer blend, which is more expensive to make.
Owing to a rise in gasoline cracks and still elevated diesel margins, global refining margins are set to stabilize in the near term though they could be under pressure later this year, which will support crude intake and crude prices as more refining capacity return from seasonal maintenance.