OPEC quota programme set to support fuel oil prices

The headlines in Crude during September were dominated by the devastating effects of Hurricane Harvey that hit the Caribbean and the coast of America, shutting down refineries and creating large draw downs in a product stockpile overhang as a knock on effect. Refinery operations declined significantly following Hurricane Harvey. Based on EIA’s reports U.S. gross refinery were said to average 15.3 million b/d in September, down from an estimated average of 17.1 million b/d in August. Refinery runs are forecast to increase to 15.9 million b/d in October. Overall, short-term conditions were seen to still be tightening throughout the month which in turn is pushing the Brent market forward and is seen as bullish for the market as a whole, we have seen Brent test year highs of around $59.50 in recent weeks.

Looking ahead, inventory draws will likely cause the market to refocus on geopolitical risks and low levels of spare capacity. Price support is also coming from economic growth globally with world GDP said to grow at 3.6% this year and estimates of 3.7% in 2018 according to the IMF. Brent has so far averaged $52.70 this year. By the end of the year it could be around $53. A pact by OPEC and other producers including Russia to cut output by 1.8 million (bpd) in order to prop up prices is due to expire by the end of March 2018, until then we see the market continuing to trend upwards in a fairly tight range as discussions to extend the pact are taking place, but production elsewhere (US) and keeping a cap on Crude.

Fuel oil across September strengthened across the month, following the trend of crude oil, and moved up around $13, before weakening back slightly into the new month. Fuel has been one of the big winners of OPEC’s cut agreement, a cut in supply of the heavy crude and a move to the more readily available sour crude for refiners has helped improve margins and has in turn sent the crack to 5 years highs and the FO premium higher even though crude has also strengthened. We have seen the Barge crack range between -7 and -6 for the month of September.

Going forward it is expected that the crack will weaken slightly more as the restart of refineries increases production and the market rebalancing provides a more stable demand. With crude expected to increase marginally into the end of the year, the main driver of fuel oil costing will be the movement of the crack. With cracks 4.50 points stronger than this time last year, fuel oil is still relatively expensive compared to Brent. There is scope for increased weakening of the crack, but with OPEC seemingly intent on keeping their supply ‘cut’ further into 2018, do not expect a flooding of heavier crude into the market soon, which will support the crack, and therefore fuel oil, at this higher level.