Demand growth and a strong commitment by Opec and its partners to their continued production cuts have supported prices even as worries of a potential US-China trade war are casting a shadow over expectations of strong demand growth.
In late March, Brent futures on Ice topped $70/bl for the first time in eight weeks, only to fall again at the start of April as trade war concerns overshadow uncertainty over Iranian supplies after US President Trump threatened to reimpose sanctions on Iran.
UK fuel retail prices, lagging as usual, have only just caught up with an earlier fall in underlying crude prices.
Stocks are falling, but the market expects the current tightness and destocking to give way to higher supply next year, especially from the US and is pricing forward supplies at a discount. Ice Brent front-month climbed to a premium of more than $5/bl to the 12-month-ahead contract in late March, its steepest backwardation since June 2014.
US output is well above 10mn b/d so far this year, and up on last year by nearly 1.3mn b/d. Together with other non-Opec production, this more than makes up for Opec’s 1.7mn b/d cut. And US production is set to reach 11.3mn b/d by the end of the year. Yet demand is also rising to feed global economic growth, which the IMF is predicting at 3.9% this year. Diesel is key in economic growth for transporting goods to ports, and European refineries continue to maximise runs to produce it.
This is increasing an underlying gasoline glut in Europe, especially for winter grade after refineries ran flat out in February. Companies were selling off surplus winter-specification gasoline from tanks to make space for summer grade fuel. The extra volume on the spot market halved the European gasoline crack spread to $4.25/bl in March, to its lowest in over three years. The start of summer-grade gasoline trading abruptly widened the spread again at the end of March. By contrast, diesel crack spreads widened slightly in March to average at $12.75. In the UK, diesel prices have remained a wide 3ppl above petrol prices at the pump but have not so far reflected the wide difference between the two fuels before the switch to summer grade petrol.