Enjoying WTI at sub $100? Since we have at most two months of WTI trading sub $115 (and Brent at $130, assuming the WTI-Brent spread does not finally collapse) according to JP Morgan, enjoy it while you can. From Lawrence Eagles: "Although oil prices fell sharply last week, on Friday we raised our Brent crude price forecast to $130/bbl for 3Q2011 due to a tight supply/demand outlook. While product cracks and crude differentials also saw some readjustment, we do not expect a major realignment in differentials going forward as the underlying pressures remain intact." In other words, as we said last week, nothing has changed (except for some margins). And since all commodities correlate as one, and since Jim O'Neill was out earlier today bashing commodities (the surest contrarian sign ever), time to load up the boat courtesy of the CME's persistent banging the speculator is likely here.
More from JPM:
Refiners are typically conservative when it comes to selecting crudes. It is not worth risking an outage just to save a few cents a barrel. But given recent sweet/sour differentials there is a major incentive to run sour crude, so many refiners are pushing limits. It is often said that sour crude use is "maxed out" due to sulfur limitations. However, recent visits to key refining clients in Asia indicate that this is not entirely true. Refiners are running as much sour as they readily can, but several said logistical constraints or preference for domestic crude is preventing them from fully maximizing sour crude use. Some pointed to ways they could possibly run more sour crude if the price is right.
It needs to be "right". Demand is growing seasonally as refiners return from maintenance but sweet crude supply is constrained. Refiners must be incentivized to run additional sour crude from Iraq and others as they ramp-up runs. In 2008, diesel/fuel oil differentials spiked to push refiners to raise runs, but then we had a much tighter refinery sector. In 2011, the critical constraint is crude volume: more crude needs to be run. The incentive must continue to come wide Brent/Urals and Brent/Dubai, especially if OPEC adds the crude the market needs.
News Flow:
In the US, Mississippi river floodwaters are expected to crest on Tuesday in the city of Memphis. But further south, waters will continue to rise and refineries will be impacted. Tanker traffic is already beingaffected due to flooding of terminals.
A portion of Venezuela's Amuay refinery experienced a significant power outage on Friday, knocking out the majority of the refinery's operating units, including a large FCC unit (108 kbd). The Isla refinery in Curacao was also a victim of a blackout, causing full plant shutdown, according to reports.
At the request of the Japanese Prime Minister, Chubu Electric Power Company is reportedly shutting its 3.5 GW Hamaoka nuclear plant. The plant lies adjacent to a fault line and is said to be at risk of damage if a major earthquake hits the area.
Numerous small news points from China drew our interest in advance of oil trade data expected tomorrow: (1) State refiners continue to ration wholesale diesel, but buying interest slowed with the fall in crude prices. Gasoline buying also reportedly slowed. (2) Sinopec is said to "outsource" about 400 kbd of gasoil and 90 kbd from independent refiners in May. Sinopec is reportedly giving a subsidy of about $6/bbl versus $2/bbl a month ago. (3) Chinese independent refiners have reportedly been running more condensate, although the volumes remain small for now at around 12-15 kbd.
Analysis
Even if refineries themselves are not flooded, deliveries of crude and loading of products will be impacted. Runs may be reduced just as US refiners are struggling to return from a period of elevated outages amidst seasonally rising demand. Recent robust US Gulf Coast exports to Latin America may be scaled back as consumers up cracks to keep products for domestic use.
Infrastructure problems continue to be a constraint for Latin America's oil industry; in addition to unplanned outages for refineries, our crude production forecasts have been lowered in this month's assessment of 2011 supply from Venezuela. Electricity shortages have been identified as a source of additional demand as consumers utilize oil to meet power needs, and with difficulties operating refining capacity, imports into Latin America from the US should continue.
A number of nuclear reactors around Japan are seeing delayed returns, but as far as we know this is the first proposed long-term shutdown of an operating plant. Public pressure of this type will continue, so it is important to note potential impacts on oil. Chubu electric has about 5 GW of oil-fired capacity, but according to company reports it is used primarily as back-up. Should it close Hanaoka, Chubu will first turn to cheaper LNG before oil. Unlike TEPCO, it can also draw on neighbors as it is on the undamaged 60 hertz western grid. Neighboring utilities including Kansai electric will also push up LNG use before oil Oil use oil. will undoubtedly surge further with peak summer demand, but the impact should be more muted than in eastern Japan.
China is unusual in that a decline in price can lead to a short-term decline in implied demand growth. This is likely due to hoarding at the retail and consumer level in anticipation of administered price increases. The opposite can happen when crude price falls. Essentially, why build stocks when price is likely to be adjusted downwards, or as in this case not adjusted upwards? Retailers/consumers simply put off purchases and drawdown stocks. Just as March and April implied demand was likely boosted by hoarding, if prices remain lower May could see destocking. At the same time, runs at independent refiners could improve due to better refining economics. Taken together, Chinese net product exports could bounce if the international crude price remains relatively low. Condensate will need to find new uses as Middle East supply ramps up faster than splitting capacity. Relatively simple teapot refineries, often running at low utilization, are a natural home for surplus condensate.
And with this down, look for Goldman to formally revise its sell rating on Crude any minute now.
It needs to be "right". Demand is growing seasonally as refiners return from maintenance but sweet crude supply is constrained. Refiners must be incentivized to run additional sour crude from Iraq and others as they ramp-up runs. In 2008, diesel/fuel oil differentials spiked to push refiners to raise runs, but then we had a much tighter refinery sector. In 2011, the critical constraint is crude volume: more crude needs to be run. The incentive must continue to come wide Brent/Urals and Brent/Dubai, especially if OPEC adds the crude the market needs.
News Flow:
In the US, Mississippi river floodwaters are expected to crest on Tuesday in the city of Memphis. But further south, waters will continue to rise and refineries will be impacted. Tanker traffic is already beingaffected due to flooding of terminals.
A portion of Venezuela's Amuay refinery experienced a significant power outage on Friday, knocking out the majority of the refinery's operating units, including a large FCC unit (108 kbd). The Isla refinery in Curacao was also a victim of a blackout, causing full plant shutdown, according to reports.
At the request of the Japanese Prime Minister, Chubu Electric Power Company is reportedly shutting its 3.5 GW Hamaoka nuclear plant. The plant lies adjacent to a fault line and is said to be at risk of damage if a major earthquake hits the area.
Numerous small news points from China drew our interest in advance of oil trade data expected tomorrow: (1) State refiners continue to ration wholesale diesel, but buying interest slowed with the fall in crude prices. Gasoline buying also reportedly slowed. (2) Sinopec is said to "outsource" about 400 kbd of gasoil and 90 kbd from independent refiners in May. Sinopec is reportedly giving a subsidy of about $6/bbl versus $2/bbl a month ago. (3) Chinese independent refiners have reportedly been running more condensate, although the volumes remain small for now at around 12-15 kbd.
Analysis
Even if refineries themselves are not flooded, deliveries of crude and loading of products will be impacted. Runs may be reduced just as US refiners are struggling to return from a period of elevated outages amidst seasonally rising demand. Recent robust US Gulf Coast exports to Latin America may be scaled back as consumers up cracks to keep products for domestic use.
Infrastructure problems continue to be a constraint for Latin America's oil industry; in addition to unplanned outages for refineries, our crude production forecasts have been lowered in this month's assessment of 2011 supply from Venezuela. Electricity shortages have been identified as a source of additional demand as consumers utilize oil to meet power needs, and with difficulties operating refining capacity, imports into Latin America from the US should continue.
A number of nuclear reactors around Japan are seeing delayed returns, but as far as we know this is the first proposed long-term shutdown of an operating plant. Public pressure of this type will continue, so it is important to note potential impacts on oil. Chubu electric has about 5 GW of oil-fired capacity, but according to company reports it is used primarily as back-up. Should it close Hanaoka, Chubu will first turn to cheaper LNG before oil. Unlike TEPCO, it can also draw on neighbors as it is on the undamaged 60 hertz western grid. Neighboring utilities including Kansai electric will also push up LNG use before oil Oil use oil. will undoubtedly surge further with peak summer demand, but the impact should be more muted than in eastern Japan.
China is unusual in that a decline in price can lead to a short-term decline in implied demand growth. This is likely due to hoarding at the retail and consumer level in anticipation of administered price increases. The opposite can happen when crude price falls. Essentially, why build stocks when price is likely to be adjusted downwards, or as in this case not adjusted upwards? Retailers/consumers simply put off purchases and drawdown stocks. Just as March and April implied demand was likely boosted by hoarding, if prices remain lower May could see destocking. At the same time, runs at independent refiners could improve due to better refining economics. Taken together, Chinese net product exports could bounce if the international crude price remains relatively low. Condensate will need to find new uses as Middle East supply ramps up faster than splitting capacity. Relatively simple teapot refineries, often running at low utilization, are a natural home for surplus condensate.
And with this down, look for Goldman to formally revise its sell rating on Crude any minute now.
0 comments