Compared to a year earlier, there has been an overall improvement in crude oil prices in 2018. The extent of the increases in the benchmarks has varied, impacted by different market fundamentals on each side of the Atlantic. At the same time, product prices have generally followed the upward trajectory of crude oil prices.
Since the end of 2016, the OPEC Reference Basket has increased by nearly 70%, gaining $30 to average $73.27/b in July 2018.
During the same period, ICE Brent improved by 60% to reach $75/b, while NYMEX WTI rose by 55% to settle above $70/b, for the first time since late 2014, at $70.58/b. Oil prices increased during this period amid decreasing oil inventories, which have switched from showing a huge overhang to the five-year average at the end of 2016, to now stand at a deficit.
Furthermore, robust global demand and growing geopolitical tension have supported the rise in crude oil prices. In addition, an all-time record increase in financial market trader activity also contributed to bullish sentiment.
Graph 1: OPEC Reference Basket (ORB) movement
The transatlantic spread between ICE Brent and NYMEX WTI widened significantly since the end of 2016, reaching as much as $12/b in May, helping to raise US crude exports to Asia and Europe to record levels. The lack of pipeline capacity from the Permian Basin weighed on WTI prices and caused bigger discounts relative to Brent, which was buoyed by rising concerns over potential supply disruptions caused by geopolitical tension. However, in recent weeks the spread narrowed, as crude stocks at Cushing saw significant draws to reach the lowest level in almost four years after an outage at an oil sands facility in northern Alberta, Canada, reduced flows to the hub.
Graph 2: Transatlantic spread between Brent and WTI
On the product side, fuel prices globally trended upwards in 2018 in response to rising crude prices. In the US, gasoline prices reached a 33-month record high of $96/b in May, up by 30% compared to $75/b a year earlier. At the same time, refinery margins performed well, reaching a high of $18.55/b during the same month, both due to refineries being offline during peak maintenance, as well as healthy product demand.
Since then, US gasoline prices have retreated slightly, as refineries came back online and refinery margins dropped to an average of $13.05/b in July. However, it should be noted that monthly demand data for US gasoline has shown some weakness so far this year, with three out of five months showing year-on-year declines. While gasoline demand growth appears to be softening, diesel in the US, on the other hand, managed to remain bullish with positive year-on-year demand growth, reaching 300 tb/d in May.
Meanwhile, refining margins in Europe did not see the usual seasonal upward trend at the end of 2017, dropping to multiyear lows of $4.15/b in March, with y-o-y changes remaining in negative territory for eight consecutive months. This was mainly driven by lower product demand, as requirements for diesel, particularly during the winter season, remained lower than expected.
Looking ahead, healthy global economic developments and increased industrial activity should support the demand for distillate fuels in the coming months, leading to a further drawdown in diesel inventories, which already stand well below the five-year average in the OECD region.
Additionally, the lack of investments in fuel oil desulphurization units, to accommodate the IMO 2020 regulations amid the declining high-sulphur fuel-oil refinery output will likely boost diesel requirement, as a cleaner substitute for bunker fuel oil. These two factors could lead to further market tightness for diesel, thus exacerbating pressure on diesel prices.
Source: OPEC