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Monthly Oil Market Update
March 2017
  • Recovery in oil price supported by OPEC compliance and tightened availability in Asia
  • OPEC output remains flat, but some upside is expected from Nigeria and maybe Libya by April
  • Non-OPEC production is forecast to increase by around 200,000 bpd through May on rising US LTO supply
  • Cracking margins in Asia and Europe continued to rise marginally in February supported by improved gasoline and diesel crack spreads

Oil price recovery continued in February, as supply tightness in Asia seems to be spreading to other regions. Whereas Dubai showed the largest gains in January, WTI on Nymex added the most in February, increasing by 85 cents/bbl month-on-month to $53.45/bbl. Brent on the ICE improved by 55 cents/bbl to $56.00/bbl, while Dubai recovered by 70 cents/bbl to $54.45/bbl. Despite the WTI price increase in February, it remained the weakest of the main benchmarks. While supply is tightening in other parts of the world, rising oil stocks, as well as rig count, point to persistent oil overhang in the US.

Compliance with the proposed cuts in OPEC production reached 98 percent in February, but this is somewhat distorted by Saudi Arabia’s continued overcompliance. Indeed, the kingdom has reduced its output by almost 750,000 bpd to 9.8 million bpd, a level last seen in January 2015. However, if Saudi Arabia is taken out of the equation then compliance by the remaining participants falls to just around 82 percent. Future OPEC levels are anticipated to rise once Nigerian field maintenance is completed (end Q2) and if Libya can implement its planned output rises.
Non-OPEC output will see some upside, especially into Q2, as US LTO volumes are expected to rise (if crude oil prices remain above $50/bbl) and some uptick is expected from both Brazil and Kazakhstan. These increases will be somewhat tempered by the anticipated reduction to Russian production.
In fact, Russian output has fallen by just over 100,000 bpd in the first two months of 2017 and is on course to meet its agreed target cut of 300,000 bpd by the end of Q2. Most of Russia’s main operators, with the exception of Bashneft and Surgutneftegas, appear to be reducing output, aided by a severe cold spell at the beginning of 2017.
North Sea output is set to recover to some extent following the resumption in early February of production from the 100,000 bpd Goliat field in the Norwegian sector.
US refining margins weakened in February pressured by higher inventory levels and waning seasonal demand for gasoline and diesel. Completion of the bulk of seasonal refinery turnarounds also boosted refined product supplies. FCC/Coking Maya/Mars complex refining margins fell by $0.68/bbl to $10.09/bbl in February. The 3-2-1 Louisiana Light Sweet (LLS) crack spread dropped by $1.44/bbl to $11.69/bbl but is expected to increase seasonally through the spring to $13.75/bbl in May.
NW European complex conversion margins (FCC/VB versus Dated Brent) in February rose 40 cents/bbl month-on-month to $4.80/bbl. Support came from gasoline and distillate cracks, while losses for naphtha and fuel oil cracks moderated the gains. The onset of summer gasoline demand is likely to support margins towards the back end of the next three months. Margins are forecast to fall to $4.05/bbl in April before recovering to $4.30/bbl in May.

After strengthening from $4.90/bbl in January to $5.30/bbl in February, complex margins in the Middle East are expected to ease on seasonal demand weakness. KBC expects Middle Eastern margins to ease gradually to $3.80/bbl, but start increasing afterwards due to higher summer demand both in the transportation and power generation sectors.
Asian HCU/FCC+VB cracking margins against Dubai crude moved upwards to $5.89/bbl in February from $5.72/bbl in January due to renewed strength in naphtha and diesel cracks, despite some further strengthening of crude oil prices. Hydroskimming only margins in Singapore dropped by almost half to around $0.63/bbl, weighed down by a decrease in fuel oil cracks. With expected weakness in light ends, cracking margins are forecast to average about $5.05/bbl in the coming few months, while margins for hydroskimming only operations will average around zero.
The question now is: Will OPEC compliance to target levels continue to drive bullish sentiment in the oil market? Also, do we expect refining margins will be impacted by recovery in crude oil prices?
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 a retainer service, please contact our regional Energy Economics Consultants (details below). 
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