OPEC and its non-OPEC partners agreed May 25 to maintain crude oil production cuts, yet prices tumbled. James Bambino explains why doubts remain about the balance of global markets and examines whether the commitment to output cuts is enough to reverse the bearish state of the spot oil market. Refined product stocks, displaced barrels and healthy refining margins all play a part in the market, and it will be important to keep a close eye on fundamentals.
For more on why the crude market rally has fizzled, read a detailed analysis from James Bambino on The Barrel blog.
Video Transcript
Despite OPEC/non-OPEC producers extending cuts, oil market fundamentals remain bearish
By James Bambino, managing editor, Oilgram Price Report
Welcome to the Snapshot, a series examining the forces shaping and driving global commodities markets today.
OPEC and its non-OPEC producing partners last week agreed to maintain what's become the status quo: holding back output until March 2018, in an effort to manage the supply side of the oil market.
Despite OPEC/non-OPEC producers extending cuts, market tumbled on March 25
On the face of it, the group appears to have done everything it could. And yet prices Thursday tumbled. Why did they fall? As many have said, it's a case of buy the rumor, sell the news. Still, doubts clearly remain. How long is the coalition expected to hold firm to this commitment? Is this commitment enough, considering the bearish state of the current spot oil market?
Last month, many in the market were caught out when crude prices fell sharply. The consensus view at that time was to give OPEC a chance, to let supply cuts work their way through the market. And yet prices fell. Yes, they did rebound, to the delight of many. But that long-awaited rally and rebalancing remains elusive.
Global oil product stocks are declining, but it may be caused by seasonal shifts
At the end of April, global refined product stocks were bloated. And while they’ve come off slightly since then, the drop appears more to be something seasonal, as opposed to this long awaited structural rebalancing that bulls are hoping for. Yes, there is structural tightening relative to seasonality, but is it enough?
In light of Thursday’s sharp drop, it is important to look at what hasn't changed about the market, because many of the very present and bearish details that should have augured caution to those that lost a lot of money in April, these details are still with us, and they still auger caution.
Spreads like the Brent/Dubai exchange of futures for swaps, or the WTI/Dubai spread, are still really narrow, and global freight rates are still cheap. This means there are very few constraints in place preventing crude from the US, North Sea, Latin America and West Africa from displacing to Asia the very barrels OPEC and company are ostensibly cutting.
Although product stocks are tighter, spot differentials show that products are still well supplied
And even though product stocks are tighter, they are still really well-supplied. That can be seen by looking at many of S&P Global Platts spot differentials, from Singapore gasoline, jet and gasoil, to ARA ULSD barges. None of these prices are showing much upside.
Part of the problem is that global refining margins are still really strong. And if refiners continue to be as profitable as they have been, there's no end in sight to the volume of refined products they're going to produce.
Remember, there is no shortage of research out there, and no shortage of experts reading the tea leaves. With that in mind, don't lose sight of the fact that expectations will keep running into the fundamentals: keep Platts news and data handy.
Until next time on the Snapshot — we’ll be keeping an eye on the markets.