Fuel for Thought: Tight oil market myth becoming reality

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The crude market isn't that tight, but the oil market is. The bullish narrative going into the Russian-Ukraine crisis was driven by a short-term perspective and flawed thinking around crude fundamentals. Now the excessive strain on supplying transport fuels is turning bullish fiction into fact.

Market watchers may be guilty of viewing leading indicators out of context.

Take the apparent lack of oil in commercial storage. OECD stock levels are indeed below the five-year average and have sunk to multiyear lows. But what this fails to recognize is that by any longer yardstick these inventories are still high and were over-inflated by the shale boom the previous decade, where an excess of light sweet crude had nowhere to go except into tanks.

The International Energy Agency reported OECD total industry stocks fell by 42.2 million barrels to 2,611 million barrels in February, which still puts inventories above the 2013 nadir and even above averages seen a decade earlier.

The storage argument often overlooks China, too. The second biggest oil consumer has built up its capacity over the past five years, and crude stocks increased 20% since 2019, according to various analyst estimates.

Market watchers also point to OPEC+'s lack of global spare capacity, which, while true, downplays the fact that for much of the last two decades the average oil buffers have not been that much higher than the 2 million b/d mark.

There is still another 1 million b/d extra that could be brought on by the end of the year if Iran gets the green light even if that is still in the balance. Maybe that's why OPEC+'s recent meeting noted "the consensus on the outlook pointed to a well-balanced market, and that current volatility is not caused by fundamentals, but by ongoing geopolitical developments."

The argument from some corners that the mandated IEA strategic reserves release leaves the system short of emergency back-up and that the crude would have to be bought back at some point is also bizarre. It still means at least 120 million barrels entering a market in the next six months, and thus an increase in supply, that has seen few barrels lost so far, and around a quarter of that being oil products and the rest being crude.

IEA oil stock draw contributions (million barrels)
US 60.559
Japan15.000
South Korea7.230
Germany6.480
France6.047
Italy5.000
UK 4.408
Spain4.000
Turkey3.060
Poland 2.298
Australia1.608
Netherlands 1.600
Greece0.624
Hungary 0.531
New Zealand 0.483
Ireland 0.451
Finland0.369
Lithuania 0.180
Estonia 0.074
Total120.000
Source: IEA

"Despite a major war and the possible loss of some Russian crude, oil prices remained below $120/b, which proves the point that market fundamentals do not support $100/b oil," said independent energy analyst Anas Al-Hajji.

Then there were the geopolitical jitters that saw crude prices spike from the cusp of triple digits toward $140/b in March on fears of sanctions, self-sanctions, boycotts and Russian oil being removed from the market. Even now commentators are keen to point to the lost barrels when there is patchy evidence the oil numbers are falling in any significant way.

S&P Global Commodity Insights analysis notes that "Russian oil exports so far continue to largely flow," with product loadings from Russian ports proving resilient in March, even for diesel seen as the tightest part of the product mix. The destinations may have changed, but the volumes haven't. A look at the differentials for key European grades assessed by S&P Global also indicates a market awash with light sweet crude.

Even the IEA noted in its monthly oil market report April 13 weaker-than-expected demand along with steady output rises from OPEC+ and the US should offset lost Russian supplies to help "bring the market back to balance."

Crunch time

But it's crunch time in the market as current arrangements for Russian purchases made before the war come up for renewal. S&P Global expects to see a loss of nearly 3 million b/d in Russian crude and products exports in the coming months as more buyers shun Russian oil.

And it's the middle of the oil barrel that will bend the market out of shape. The lack of diesel stocks and the importance of Russian diesel supply to Europe is showing up in the high gasoil and diesel cracks.

Stocks of diesel and gasoil in the Amsterdam-Rotterdam-Antwerp hub in Northwest Europe dipped 1.6% on the week to an 11-year low of 1.439 million mt in the week to April 20, Insights Global data showed April 21. And TotalEnergies' European refining margin indicator surged to $46.3/mt in the first quarter, up from $5.3/mt a year earlier, as distillate cracks ballooned on the back of the Russia crisis, it said April 19.

Goldman Sachs said in a research note "the current distillate shortage is even stronger than in 2008," pointing to the low stocks and large seasonally adjusted deficit which is getting worse, along with "a large increase in jet fuel consumption this summer due to the return of international travel" and continued gas-to-oil switching.

Indeed, refiners will often wiggle between maximizing production of jet or diesel, and with both likely being tight, options to plug the gap become limited. Add to that the fact that US summer driving season will start to put pressure on gasoline supply, and the oil products mix may start looking extremely tight.

Standard Chartered noted that "oil price volatility has been mirrored by volatility in estimates of key fundamental indicators," pointing out that while the downside to Russian oil output is large, so is the downside risk to demand. It then comes down to how much that eases the pressure on demand for transport fuels along with the oil products released from the IEA.

The fundamentals could soon start to catch up to the bullish sentiment. That leaves the question as to whether the market is pricing in the risk or has misunderstood it, potentially ending up being right for the wrong reasons.

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News

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News

Russian refinery damage escalates after latest Ukrainian drone strike

Strikes affect almost 1 million b/d gross capacity Ukraine using bigger explosives with 'steel balls' in drones Russian oil products exports at postpandemic low Russian refining capacity damaged by Ukrainian drone strikes rose further over the weekend May 18-19 to almost 1 million b/d after the 70,000 b/d Slavyansk oil refinery in the southern Krasnodar region was forced offline, according to local reports. The Slavyansk refinery -- which was previously struck on April 27 and March 17 -- was targeted by six drones May 18-19, Russia's state-run news agency TASS reported May 20, citing a company security official. TASS quoted the security official, Eduard Trudnev, as saying that the Ukrainian drones were bigger and more powerful than in previous attacks. "This time the drones were bigger, the charges were bigger too, and they were stuffed with steel balls," TASS cited Trudnev as saying. TASS cited the press service of the regional administration saying, however, that no fires were recorded after the drone attack. Slavyansk, a small export-oriented plant near the Black Sea, was last targeted three weeks previously, when an April 27 attack was suspected to have left a naphtha separation column damaged. A previous attempt on the site left a crude distillation unit and a vacuum distillation unit offline, though full operations were restored within a month. The attack comes two days after Ukraine launched a major strike on oil infrastructure in occupied Crimea and other Russian Black Sea oil infrastructure. Drone strikes May 17 caused fires at Rosneft's 240,000 b/d Tuapse refinery, which had only recently been restarted following a previous incident in January. Russia has alleged that French-made missiles were discovered in the Yubileiny settlement in occupied Luhansk May 20, while US artillery has been fired over Crimea, according to TASS May 20. Meanwhile, attacks deep within Russian territory continue to be conducted with domestically-produced Ukrainian drones even as its Western allies have stipulated military aid should only be used for defensive purposes. Export impact Combined, Russia's gross refining capacity potentially affected by drone strikes now stands at almost 1 million b/d, up from about 680,000 b/d on May 10, according to S&P Global Commodity Insights estimates. Russian oil products exports slumped to a postpandemic low in April, according to tanker tracking data, as Moscow battles to repair its western refineries under siege from Ukrainian drones. Russia's biggest fuel exports -- diesel and gasoil -- have continued to shrink this month, averaging 686,000 b/d to May 20, down a further 130,000 b/d from April and 405,000 b/d lower than in January, according to S&P Global Commodities at Sea. High stock levels, in excess of 2 million mt, coupled with ample availability on the exchange floor were keeping a cap on gasoline prices in Russia's domestic market and offsetting the upside momentum linked to the expected lifting of the export ban, according to sources May 17. Strikes on the month/ongoing damage: Date Name Capacity (b/d) Impact Status Domestic/export focus Approximate distance from Ukrainian border Previous attacks 18-May, 19-May Slavyansk (Slavyansk Eco) 70,000 Refinery damaged by attack, units unspecified Offline Export 350 km April 27 - suspected damage to naphtha separation column. March 17 - CDU and VDU outages - units back online within a month 17-May IPP oil products export terminal - Operations temporarily suspended Fully operational Export 400 km 17-May Transneft Grushevaya oil depot - Gasoline storage tank damaged Partly operational Export 400 km 17-May Novorossiisk fuel oil terminal - Debris hit two fuel oil storage tanks Partly operational Export 400 km 17-May Tuapse (Rosneft) 240,000 Fire caused by downed drone, suspected to reach CDU Partly operational Black Sea export hub for refinery feedstocks 400 km Jan 25 - VDU outage due to fire. Unit brought online within around 3 months 12-May Volgograd (Lukoil) 314,000 Fire at site Partly operational - AVT-1 CDU expected back online by end of May. Planned works on CDU AVT-6 expected until June Domestic fuel source to Southern Russia, pipeline connection to Novorossiisk for diesel exports 350 km Feb 3 - CDU VDU 5 unit set fire. Unit brought online within around one month 10-May Rovenky, Luhansk oil depot - Fire at site Partly operational Domestic 110 km 10-May First Plant 24,000 Three diesel tanks and one fuel oil container set fire Partly operational Domestic 260 km 9-May Salavat (Gazprom) 200,000 Fire in FCC unit Fully operational Exports to Central Asia, Arctic, Baltic and Black Sea ports 1,300 km 9-May Krasnodar oil depot - Several storage tanks damaged Partly operational Domestic 350 km 8-May Luhansk oil depot - Fire at site Partly operational Domestic 130 km 1-May Ryazan (Rosneft) 342,000 Fire at site Partly operational - one CDU offline though production unaffected Domestic - fuel supply source to Moscow, Pipeline connection to Primorsk for diesel exports 460 km March 13 - Two CDUs damaged. Units brought online within around two months 27-Apr Ilsky (Kubanskaya Neftegazovaya Kompaniya) 132,000 Suspected damage to AT-1 unit Fully operational Black Sea export hub 340 km Feb 9 - CDU, oil products tank damaged. Unit back online within a month 23-Mar Kuibyshev (Rosneft) 140,000 Both CDUs offline after fire One CDU resumed, second undergoing repairs, plant operating around 50% capacity Domestic diesel source, heavy fuel exporter 920 km 16-Mar Syzran (Rosneft) 178,300 Fire at processing unit, CDU offline Main CDU, AVT-6 offline, operating around 30% capacity Diesel exporter to Eastern Europe, domestic supply to central Russia. 700 km 12-Mar Norsi (Lukoil) 340,000 Fire extinguished at site, CDU halted FCC unit repairs expected to last until summer, CDU AVT-6 expected back June Domestic -- key gasoline supply source 800 km Source: S&P Global Commodity Insights, local reports