THE ONYX VIEW | JULY 2018

Published 10 JULY 2018

 

What do we expect IN JULY?

 

Market is oversupplied in crude,
but the balance is shifting to products

We are in the environment of an oversupplied crude market: Europe is struggling to clear the barrels domestically produced and the constant flow of competing crudes from the US is further dampening the outlook. However, as we continue into Q3 it is likely we will see an uptick in Europe as field maintenance takes some barrels out of the market. The US market is revolving around the physical being moved out of Cushing to be exported or refined.  However, with the high utilization rates in the US, although the Cushing glut is being temporarily alleviated, it is being displaced by a product glut, in an already fragile product market. Over the longer term, producers will move their barrels into Cushing to sell their physical at premiums causing no net impact to Cushing but putting strain on the products yielded. Hence, we see the oversupply shifting from crudes into products.

 

 
 
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IN Q3 will likely see an uptick in Europe as field maintenance takes some barrels out of the market.

 

Products weak in a usualLY strong
demand season, showING the true weakness
in the market

The most telling statistics are the product stock levels. There were stock builds in the ARA region for naphtha, gasoline and fuel oil, whilst gasoil remained unchanged; as mentioned, US product stocks built consistently. Product demand is meant to peak during the summer, so the builds are inadvertently showing the weakness in the product market. We expect this will continue into Q3. Without some external stimulus, such as a hurricane, the high utilization rates and consistent product builds will further dampen product cracks.

 

The draws are more a sign of the market being encouraged to appear as though
it is strong

With the current agenda to clear prompt US physical out of Cushing, we expect US paper will hold strong but with high volatility going into July; crude draws and high refinery utilization should support this hypothesis. But, the reality is exports can’t be absorbed by Europe as even local light barrels struggle to clear. Secondly, if Asian traders bring more barrels online as Saudi reduce their OPEC compliance levels, the light US barrels that move into Asia will struggle to find alternative outlets. This may as early as July with reduced OSPs for light-Asian bound crudes.

 

Margins holding due to weak crude diffs, not strong product cracks 

Refinery margins are still profitable, which we believe is being driven from weak crude oil prices rather than strong product crack prices. This is except for fuel oil cracks, which showed strength in June boosting profitability. However, this spike was induced by a strong Eastern pull which we expect will begin to tail off as Eastern fuel oil storage continues to build.  


We believe, in this current imbalance, given the negative crude diffs and refineries running at close to 100%, the market is oversupplied with crude rather than being led by strong product demand. Hence, we expect this to filter through to the market in the form of weakening product cracks rather than strengthening crude diffs. As the product cracks weaken further, it will put pressure on profitable margins.

 
 

OUR CONCLUSION
JULY 2018

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We expect the weakness to continue for light product cracks, and so would suggest to short the refinery margin of a light crude such as CPC.

 

Short CPC refinery margin

8:2:3 Naphtha, Kerosene, Gasoil

We expect the underlying crude oil physical market to be under pressure, but would suggest to short structure outside of the pricing month to avoid prompt dislocations.

 

Short crude structure

UZH Brent & WTI Fly

Our overarching view is the crude oil market is fundamentally weak, and the physical and futures market will re align going in to the second half of the year.

 

Buy put option

January 2018 put option

 

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