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MAY 2018 in review

Published 04 JUNE 2018

The crude oil market panned out pretty much in par with expectation at the beginning of the month, as we have seen considerable weakening of market structure coming into June. The North Sea has fallen into contango structure and the US has been unable to support high levels of production, as mentioned in the outlook. Products, however, performed not quite as expected - on the contrary - as we have seen mild strengthening across the barrel. Part of the reasoning for this is refinery profitability, which has dropped more so over the month, so we still stand by our initial view.

May began as a month of promise for market bulls, with spiking open interest and considerable optimism in the future underlying health of the market despite a weak physical market in the prompt. The result has been a shift to a dislocation between certain derivatives and physical prices, whilst a drop off in volatility and profit taking towards the end the month hampered such enthusiasm. 

 
May began as a month of promise, but surrounding competing markets from the Med and West Africa, as well as US exports, was too much for the physical light sweet market
 

Our take on the market can be
summarised by the following:

 

DATED BRENT

  • We believed the Dated Brent market was heavily positioned long coming into May and initially the enthusiasm transpired into strong price action in the North Sea physical differentials and paper contracts.
     
  • However, as the month progressed (and despite a substantial number of cargos clearing to Asia) surrounding competing markets from the Med and West African market, as well as ever strong US exports, was too much for the physical light sweet market to bear.
     
  • However, despite a substantial number of cargos clearing to Asia, it transpired that competition from the Med and West African market, as well as notably strong US exports, was too much for the physical light sweet market to support.
     
  • The weakness filtered through into the paper contracts leaving the pricing assessments ultimately disappointing for the market bulls.
     
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GLOBAL CRUDE MARKET

  • The Asian market held strong into May, as the Dubai benchmark priced out consistently high over the month, setting implied physical levels at the strongest this year so far.
     
  • The US physical market on the other hand remained under pressure, with continual builds in Cushing stocks and continuing weakness in WTI midland grades as shale production continues to grow. The consistent weakening
    in WTI-Brent has further incentivised barrel movements into Europe, but even so, this hasn’t been enough to impact US glut.
     
  • Trump’s decision to renew Iranian sanctions led to an uptick in the sour European complex. With uncertainty over the Iranian sour grades availability into Europe, European refiners sourcing sour crude looked for substitutes, of which Urals is the most readily available. In turn, Urals picked up towards the end of the month, followed shortly by lighter yielding crudes such as CPC, as these are often used to blend with sour crude grades to allow for a more palatable intake into refiner’s CDUs.
     
  • Towards the end of the month, we saw continual decreases in open contracts in both WTI and Brent futures, whilst $80/bbls on prompt Brent presented a new resistance level.

 

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Products & Refinery Margins:

  • Refinery margins globally for light end crudes remained highly profitable with the majority of European refiners still running at reduced rates from maintenance and light sweet crudes differentials weakening.
     
  • Meanwhile the margins for sour crudes were significantly worse, coming off to negative towards the end of the month in Europe.
     
  • Gasoline’s performance was the strongest of the barrel, with paper contracts performing as sentiment for seasonal demand alongside continual stock draws provided optimism.
     
  • Despite crude price volatility throughout May, Gasoil remained relatively stable with a reasonably healthy prompt market globally.
     
  • The feedstock market (VGO and straight-run) conversely was under pressure from reduced run rates and poor demand from the US as WTI/Brent weakened considerably.