Opec and its non-Opec partners decided on November 30 to extend their production cuts for another nine months, until the end of next year. Expectations of the deal had been keeping crude futures prices above $63/bl since November 22, supporting road fuel prices.
UK retail prices have been rising in the past month and, with their usual lag to the wholesale market, are likely to flatten tracking a $3.40/bl drop in gasoline prices in the second half of November from the first half, and largely flat gasoil prices.
Most of the 3.5mn b/d refining capacity that had been closed by Hurricane Harvey in the US Gulf has come back, but not all, with some 540,000 b/d still out. The return to something approaching normal diesel supplies from the region has slightly reduced diesel crack spreads in North West Europe, although they remain strong at over $11/bl.
Greater supply has also put an end to a strong backwardation in Ice gasoil futures prompt prices at a premium to forward that had facilitated stock draws in the weeks after the hurricane. The market has returned to a slight contango since mid-November.
Easing in the diesel market has also narrowed the unusually large refining margin advantage of diesel over gasoline of over $5/bl on average in October, and this shrank to just $2/bl in November. The gap has yet to narrow again in the UK retail market.
Opec and non-Opec producers’ production cuts of some 1.7mn b/d since the start of the year have forced stocks to fall back from record highs closer to the five-year average, as Opec intended.
Distillate stocks in the US at a two-and-a-half-year low, and in Europe at a two-year low, make Atlantic diesel markets more vulnerable to sudden heating oil demand spikes in the US and Germany in the event of a cold winter.
But next year, the start up of over 1.8mn b/d of extra production from non-Opec members, according to Argus estimates, could well return the world to an oversupply of oil. The additions are higher than the Opec cuts and, unless demand continues to grow strongly, oil stocks could start to build again, weighing on crude and product prices.