February Industry Affairs

Physical oil market sends warning to OPEC: Rout might not be over

Reuters News

14 February 2018 07:18,

877 words,



Copyright 2018 Thomson Reuters. All Rights Reserved.

[LBA Logo]

877 words,



Copyright 2018 Thomson Reuters. All Rights Reserved.

LONDON (Reuters) - As OPEC watches a near 15 percent drop in the oil price in three weeks, important indicators in the physical crude market are flashing signals that the decline might be far from over.

The warnings come not from the heavily traded futures market, but from less transparent trading activity in crude oil and products markets, where key U.S., European and Russian crude prices have fallen of late, suggesting less robust demand.

Benchmark oil futures have plunged in recent days together with global stock markets due to concerns over inflation as well as renewed fears that rapid output increases from the United States will flood the market with more crude this year.

OPEC, including its Secretary-General Mohammad Barkindo, argues the decline is just a blip because demand is exceeding supply and that prices won't plunge again to $30 per barrel as they did in 2015 and 2016.

Traditionally, when oil futures decline, prices in the physical markets tend to rise because crude is becoming cheaper and hence more attractive to refiners.

But in recent weeks, differentials in key European and U.S. markets such as North Sea Forties, Russia's Urals, West Texas Intermediate in Midland, Texas, and the Atlantic diesel market have fallen to multi-month lows.

The reasons tend to be different for most physical grades but overall the trend paints a bearish picture.

"Physical markets do not lie. If regional areas of oversupply cannot find pockets of demand, prices will decline," said Michael Tran of RBC Capital Markets.

"Atlantic Basin crudes are the barometer for the health of the global oil market since the region is the first to reflect looser fundamentals. Struggling North Sea physical crudes like Brent, Forties and Ekofisk suggest that barrels are having difficulty finding buyers," he added.

This follows a run-up in U.S. production to 10.04 million barrels per day as of November, the highest since 1970. The increase pushed the United States into second place among crude producers, ahead of Saudi Arabia and trailing only Russia, according to the U.S. Department of Energy.

On Tuesday, the Paris-based International Energy Agency said increased U.S. supply could cause output to exceed demand globally in 2018.

Forties crude differentials to dated Brent have fallen to minus 70 cents, from a premium of 75 cents at the start of the year as the Forties pipeline returned to normal operations.

Forties differentials are now not far off their lowest since mid-2017, when the benchmark Brent crude price was around $45 per barrel, compared to $62 now and $71 a few weeks ago.

In the United States, key grades traded in Texas and Louisiana have fallen to their lowest in several months.


A similar pattern can be observed in the Russian Urals market, one of the biggest by volume in Europe.

At a discount of $2.15 to dated Brent, Urals' differentials in the Mediterranean are now at their lowest since September 2016, when Brent futures were around $40-$45 per barrel.

"Sour grades are not in good shape worldwide" and neither are Urals, said a European crude oil trader, who asked not to be identified as he is forbidden from speaking publicly.

That contrasts with the start of 2017, when OPEC cuts to predominantly sour grades made them attractive to buyers.

"Supply is more than ample in Europe, Urals face strong competition from the Middle Eastern grades," said another trader on the Russian crude oil market, adding that supplies of Urals to Asia were uneconomic due to a wide Brent-Dubai spread.

Adding pressure on Urals, traders expect loadings of the grade to rise in the coming months due to seasonal maintenance at Russian refineries.

A decline in physical crude values generally means better margins for refiners. But it is also not happening this time.

The profit margin refiners make on processing crude into diesel collapsed in Europe and the United States by over 18 percent in the past week, according to Reuters data.

Europe, where nearly 50 percent of vehicles are fueled by diesel, is home to the global benchmark for diesel prices and the biggest storage hub for the road fuel as regional refineries are unable to meet local demand.

"Oil demand isn't that bad in general, but heating oil demand has been horrible, particularly in the United States and Germany," Robert Campbell, head of global oil product markets at consultancy Energy Aspects, said.

"European refineries are running at very high rates since December so there is plenty of supply in the region while the weather has been warmer than usual, which led to weaker demand."

The refined product markets were expected to tighten significantly in March and April due to a busy schedule for seasonal refinery maintenance. [REF/E]

But in a further indication of wavering confidence, the spread between the April low-sulfur gasoil futures to the May contract also crashed in recent weeks from an all-time high premium of $5 on Jan. 26 to a discount of 50 cents on Tuesday.

(Additional reporting by Devika Krishna Kumar; Editing by Dale Hudson and Adrian Croft)

Released: 2018-2-14T12:18:44.000Z

Thomson Reuters (Markets) LLC

Document LBA0000020180214ee2e00io9

Wall Street Journal


The Wall Street Journal Online



Shale Output Hasn't Grown This Fast Since Oil Was at $100; In closely watched report, IEA warns U.S. crude output is set to outpace demand in 2018

Christopher Alessi,

The Wall Street Journal Online

Christopher Alessi,

13 February 2018 12:46,

863 words,



Copyright 2018 Dow Jones & Company, Inc. All Rights Reserved.

[WSJO Logo]

863 words,



Copyright 2018 Dow Jones & Company, Inc. All Rights Reserved.


LONDON—U.S. shale companies are churning out crude oil at a record pace that could overwhelm global demand and reverse the oil market's fragile recovery, a top energy-market observer said Tuesday.

U.S. shale production is growing faster in 2018 than it did even during the boom years of $100 a barrel oil prices from 2011 to 2014, said the International Energy Agency in its closely watched monthly report. The difference this time: Oil prices are about 40% lower.

The situation is "reminiscent of the first wave of U.S. shale growth," when a flood of American oil built up a global glut and sent prices crashing over four years ago, said the Paris-based IEA, which advises governments and corporations on energy trends.

Oil prices fell after the report's release in Europe. Brent, the international benchmark was down 0.69% at $62.17, while U.S. prices were down 1.35% at $58.51.

Shale producers "cut costs dramatically" during the oil-industry downturn, the IEA said. They then took advantage of the Organization of the Petroleum Exporting Countries cartel's decision last year to cut its own output, which helped prices rise from the low $40s to over $70 a barrel in January.

Unlike countries like Russia, shale-oil companies—using techniques like hydraulic fracturing, or fracking—are able to pounce when prices rise and pull back when the market falls. They can drill wells, and then wait to complete the process until it is profitable.

Shale-oil producers had promised investors that they would focus on profits this year as prices rose and abandon the pump-at-any-cost mentality that crashed the market. But shale companies have a backlog of nearly 7,000 wells that have been drilled but not completed. That allows operators to increase production by extracting oil from the backlog rather than spending significant amounts on drilling, meaning U.S. output could rise even higher than expected.

U.S. oil output could rise as high as 11 million barrels a day by 2019, some oil-industry analysts say, rivaling that of Russia, the world's biggest crude producer. The U.S. currently pumps over 10 million barrels a day, the most since 1970.

"All the indicators that suggest continued fast growth in the U.S. are in perfect alignment," the IEA said.

Led by U.S. shale companies, crude output from non-OPEC nations is expected to outpace the growth in oil demand in 2018, the IEA said. That is an important data point for oil traders who have been watching to see if shale production could catch up to robust demand that has been fueled by a strong global economy.

"U.S. shale is growing as sharply as it was in 2013-2014," said Bjarne Schieldrop, chief commodities analyst at SEB Markets. But the situation is different now because of the OPEC-led agreement to curb production, Mr. Schieldrop added.

OPEC and 10 other countries including Russia—whose combined output accounts for over 55% of global supply—have cut far more than the 1.8 million barrels a day they promised, according to the IEA.

The shale-oil growth will apply downward pressure on prices in the coming weeks. But as long as OPEC sticks to the deal, there won't be a dramatic correction, Mr. Schieldrop said.

Saudi Arabia's oil minister, Khalid al-Falih, has said there is an "oversized focus" on shale production growth. "I don't lose sleep over it," Mr. Falih said during the World Economic Forum last month in Davos, Switzerland.

Until two weeks ago, oil prices had risen almost nonstop for over six months.

The optimistic sentiment was driven not only by OPEC but also by strong economic news, geopolitical flare-ups in Iraq, Saudi Arabia and Iran, and supply outages in Venezuela and the U.K. Separately, oil storage levels around the world have fallen.

The IEA said commercial oil inventories in the Organization for Economic Cooperation and Development—a group of industrialized, oil-consuming nations, including the U.S.—fell by 55.6 million barrels in December, in the largest drop since 2011.

"The huge drop in inventories is a bullish signal," said Giovanni Staunovo, commodities analyst at UBS Wealth Management.

But inventory levels in the U.S. have begun to rise again, after months of falling, as U.S. output rises. The IEA on Tuesday noted that as "oil price rises have come to a halt and gone into reverse…so might the decline in oil stocks, at least in the early part of this year."

Write to Christopher Alessi at christopher.alessi@wsj.com


* Oil Down Over Concerns About Rising U.S. Output

* U.S. Shale, OPEC Pull Oil Prices in Opposite Directions

* OPEC Raises Supply Forecasts on Higher U.S. Output

* Trump Administration Plans to Undo Methane Rule

* Big Oil Is Rewarding Investors Again

* Analysis: Deja Vu: Oil Investors Could Relive 2014's Swings

Dow Jones & Company, Inc.

Document WSJO000020180213ee2d0018h