Daily Oil Fundamentals

Sentiment Sours as Fed Turns Hawkish

Yesterday’s two decisive factors in shaping the mood of investors and the direction of risk assets were the Weekly Petroleum Status Report from the EIA and the interest rate decision from the Fed. The stock report did not disappoint, the boat has not been rocked. The latest snapshot on US oil stockpiles confirmed the impending tightness in regional and global oil balance in 4Q 2023. Yesterday’s FOMC meeting, whilst does not foresee economic Armageddon, paints a rather perilous journey in 2024, however.

Oil inventories in major categories all declined during the latest reporting period. A massive swelling in gross crude oil exports pushed net imports down by 3 mbpd to 1.5 mbpd leading to a stock draw of 2.2 million bbls. A fall of 1.8% in refinery utilization rates (-8.2% in the Midwest) significantly contributed to the 2.9 million bbls plunge in distillate and the 831,000 bbls fall in gasoline stocks. Demand is holding up well, it is flirting with the 21 mbpd boundary. Proxy demand for distillates registered a weekly jump of 600,000 bpd to 4.2 mbpd. Current stocks, therefore, would only cover less than 29 days of consumption, 6 days lower than last week’s value. Based on the updated stock figures, oil deserved better but maximum pain is being inflicted after yesterday’s FOMC meeting.

As widely expected, the Federal Reserve left interest rates untouched in the 5.25%-5.5% range but policy makers did not rule out another hike in this year. It is unlikely to have an adverse impact on the 4Q oil balance, but continuously high deposit rates could easily dent oil demand growth next year. The updated quarterly projections now show a mere 0.5% decline in borrowing costs by the end of next year, compared to a full percentage point three months ago. For this reason, it is improbable that a rally towards the $100 level in coming weeks will be sustained throughout 2024.

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Today’s data




Riksbank Interest Rate Decision




SNB Interest Rate Decision




Norges Bank Interest Rate Decision




BoE Interest Rate Decision



Refiners are Turning Around in Europe and the US

Those who believe that the bull run that suffered a setback yesterday is far from being over would quote several reasons for their optimism. The supply side of the oil equation is unreservedly price supportive. With record global consumption being registered for the last quarter of 2023 severely constrained output from the OPEC+ alliance, both deliberate and involuntary, is creating a supply deficit not seen for over 15 years. The proximity of peak interest rates, the argument goes, is a firm indication that global recession has been avoided, consequently oil demand growth should remain sturdy leading to robust stock depletion. This unequivocally constructive backdrop has pushed the major futures contracts into backwardation creating additional financial demand for oil. Boycotts and embargoes on Russian exports, albeit being mitigated by “friendly” nations, result in extended voyage times, higher freight, and insurance rates, which will not ease supply concerns considerably. Finally, and this would be the main topic of today’s note, refiners in main demand centres have already gone or just about to go into maintenance and this could aggravate plausible product tightness for the remainder of the year.

These turnarounds are partially planned but they are also the outcome of delayed work from pandemic-related shutdowns and the outbreak of Russia’s war against Ukraine. It will come at a time when refining margins are historically high, another consequence of the war in the middle of Europe. Perhaps this round of turnarounds will be the least disruptive in Europe where the majority of the work was carried out in the first quarter of the year. According to Wood Mackenzie, there will be around 800,000 bpd capacity taken offline in the October-December period, which is 200,000 bpd higher than in 3Q but 40% lower than in the corresponding period of 2022. Major affected refiners are the German Gelsenkirchen plant, Sweden’s Gothenburg refinery and the Portuguese Sines site. Lighter maintenance logically means easing dependence on imports, nonetheless diesel demand cannot not be fully satisfied from within the region, far from it.

Russia’s voluntary crude oil export curb of 300,000 bpd might imply that refiners will ramp up utilization rates after the maintenance period is over at the end of next months and ship products abroad. Whilst this might sound logical on paper it is likely to play out differently in practice. An intriguing piece on the topic in one of the recent editions of Petroleum Intelligence Weekly points out that priority presently lies with ensuring adequate supply of the domestic market ahead of next year’s presidential elections. Additionally, refiners, due to the halving of refining subsidy at the beginning of September, are disincentivized to ramp up runs.

The significant depletion in US crude oil inventories in recent weeks is a telltale sign of the upcoming maintenance period. A heavy 1Q turnaround will be followed through as refiners are eager to achieve a normalized schedule, which was disrupted by the pandemic and its knock-on effect felt throughout 2023, in 2024. The impact will be most acute on the Atlantic Coast where fuel suppliers are rushing to secure distillate supplies. Capacity going offline will have an adverse effect on distillate deliveries. Irving Oil’s 320,000 bpd Saint John plant and the 190,000 bpd Trainer, Pennsylvania refinery run by Delta Airlines are the two most prominent plants that will undergo scheduled works for 6-8 weeks. Considering that the PADD1 is responsible for 4/5 of the US heating oil consumption and the expected shortage in Europe, the scarce availability of distillates in the Northeast of the US could lead to increased volatility and price spikes. The EIA forecasts that nationwide crude oil input to refineries will decline from 16.31 mbpd in 3Q to 15.70 mbpd in 4Q and on-highway diesel fuel retail prices, including taxes, will increase from $425/bbl to $468/bbl quarter-on-quarter. Refinery maintenance work is yet another factor that might ostensibly contribute to depleting product stockpiles and stable prices towards the end of the year.


Overnight Pricing

21 Sep 2023