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Monthly Oil Market Update
February 2017
  • Recovery in crude oil prices could be constrained by approaching refinery maintenance season and lower levels of refiner demand for crude
  • High compliance within OPEC in January led to about 1 million bpd in production cuts
  • US Gulf Coast refiners are increasingly relying on Latin American export opportunities
  • Asian cracking margins are expected to stay supported by gasoline, which remains the most profitable oil product within the region

Oil prices remain in a recovery mood following the decision by OPEC and leading non-OPEC producers to cut output by as much as 1.8 million bpd, although frigid temperatures in northern Asia, Europe and North America also helped. However, traders are struggling to find any immediate signs of a market rebalancing in stocks. Indeed, seasonal refinery maintenance in the next few months will complicate the situation further by limiting crude oil requirements.

Brent on the ICE gained 55 cents/bbl month-on-month to average $55.45/bbl in January, the highest monthly level since July 2015. Similarly, WTI on Nymex added 50 cents to reach $52.60/bbl, its highest mark since June 2015. Dubai was buoyed by production cuts in the Middle East and recovered by $1.60/bbl in January, compared to December, to average $53.70/bbl. This resulted in a sharp tightening of the spread between Brent and Dubai; the Asian benchmark was also at a premium to WTI.
OPEC members have begun to reduce their production to comply with cuts agreed at the group’s meeting last November. Saudi Arabia has reportedly decreased its output in January to 9.9 million bpd, some 80,000 bpd below its agreed level of 10.06 million bpd. Iraq has apparently cut close to 180,000 bpd of production, initially from state-operated oilfields (which normally produce around 720,000 bpd), as compensation would have to be paid to those fields operated by foreign partners should the state order any production curtailment. Nigerian output remains unpredictable, susceptible to further militant attacks on infrastructure. Libyan production levels continue to improve as more fields and all ports reopen, but growth in output will remain restricted by the damaged infrastructure.

In the non-OPEC sector, the US land oil rig count has risen to 566 units (week ending 27 January). Over 50 percent of total rigs are located in the Permian Basin and account for more than 65 percent of rigs added since May 2016. Indeed, service companies such as Halliburton are expecting an uptick in activity in the US shale plays during 1H 2017 and are looking to add staff.
In the US Gulf, Maya/Mars complex refining margins fell by around 25 cents/bbl month-on-month to $10.75/bbl in January, while Louisiana Light Sweet (LLS) 3-2-1 cracks dropped by 65 cents/bbl to $13.15/bbl. Margins are likely to weaken further in February, mainly in response to excess US gasoline stocks. However, unplanned refinery outages in Latin America continue to support US export demand.
European conversion margins (FCC/VB versus Dated Brent) rose 75 cents/bbl month-on-month to $4.40/bbl in January. There was support at the top and bottom of the barrel, with naphtha and low sulphur fuel oil in particular both performing well, but middle distillate cracks were either flat or falling. Margins are set to rise on spring turnarounds and remain supported ahead of summer gasoline demand.

The HCU/FCC+VB margin in the Middle East strengthened to around $4.90/bbl in January, thanks to planned and unplanned outages in the Middle East and Asia, up 45 cents/bbl month-on-month.
Since there is no significant refinery maintenance in the Middle East planned before May, the region will remain well supplied in the next few months, bringing the average complex refining margin down slowly to $4.20/bbl by April.
Asian HCU/FCC+VB cracking margins versus Dubai crude were up marginally in January to $5.70/bbl from $5.30/bbl in December on strong support from gasoline and naphtha. However, margins appeared to be capped by gradually improving crude oil prices. Average Singapore hydroskimming margins were relatively unchanged from last month at $1.20/bbl as fuel oil prices have weakened on a recovery in Singapore inventory levels and sustained strength in crude oil prices. Cracking and hydroskimming margins are forecast to average $5.50/bbl and around $0.30/bbl, respectively, in the next three months.
The question now is: Will the recovery in crude oil prices be sustained in 2017? Also, do we expect that refining margins will be impacted by the crude oil price recovery?
The full version of KBC Energy Economics’ Monthly Oil Market Outlook report is available to retainer Clients. If you are interested in obtaining further information about our retainer service, please contact one of our regional Energy Economics Consultants (details below).
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