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Diesel traders are snapping up ocean-going tankers to haul millions of barrels of European diesel to the U.S., where the coldest weather in years has brought swaths of the petroleum industry to a halt.

At least eight tankers have been provisionally hired in recent days to take consignments of the fuel — a near identical product to U.S. heating oil — across the Atlantic, lists of vessel charters compiled by Bloomberg show.

The cargoes amount to almost 2.8 million barrels in what would represent a big increase in deliveries if all the consignments do go to the U.S. As is normal, the bookings also include options to sail elsewhere.

The freezing weather in the U.S. has cut 3 million barrels a day of oil refinery processing and left millions of homes and businesses without electricity. Rates for tankers to bring cargoes from northwest Europe surged 25% on Tuesday, lifting earnings on the trade route to the highest since September. They slipped slightly on Wednesday.

The U.S. east coast normally gets large volumes of fuel from the Colonial Pipeline system that starts in the Gulf of Mexico. Diesel supplies are “certainly needed due to outages in U.S. Gulf, and a potential lack of product coming up the Colonial pipeline,” said Richard Matthews, head of research at E.A. Gibson Shipbrokers Ltd. in London.

Tanker owners were able to push for higher freight rates because of the “above usual” levels of diesel heading to the U.S. and as vessel supply became more constrained toward the end of last week, he said.

While many of the refineries out of action are in Texas, it’s the east of the U.S. that’s a more likely destination for the cargoes.Europe has been shipping diesel cargoes to the Atlantic coast in recent months, a historically unusual trade driven by strong demand from truckers in the U.S., and weak diesel consumption in Europe where lockdowns have curbed the fuel’s use in cars.

Currently, about 2.1 million barrels of European diesel are already en-route to the east coast, according to ship-tracking and fixture data compiled by Bloomberg. U.S. diesel inventories are at a eight-month low in the region.

At least five of the eight vessel bookings have so far been fully concluded.

Bloomberg, by Kevin Crowley, February 25, 2021

Saudi Arabia’s oil minister has called for a cautious approach to raising production, even as prices surge and many traders anticipate an increasingly severe shortage of petroleum later this year.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” the minister said in a speech on Wednesday.

In contrast, futures markets point to a rapid tightening of supply, with front-month Brent up more than $25 per barrel or 65% in just over three months since successful vaccine trials were announced in early November.

Brent’s six-month calendar spread has surged into a backwardation of more than $3.70 per barrel, putting it in the 94th percentile for all trading days since 1990, and indicating traders expect a rapid depletion in oil stocks.

The spread was this strong for brief periods during 2019 and in the first few weeks in 2020, flashing expected tightness, but the last time it was this tight on a sustained basis was in 2013.

OPEC+ AND TRADERS

Disagreements between the Saudi oil minister and traders about the forecast balance between production and consumption historically have been common at this point in the price cycle.

Saudi Arabia and other producers in the Organization of the Petroleum Exporting Countries, as well as the broader group of allies led by Russia (OPEC+), tend to be over-pessimistic about consumption early in the upswing.

Part of the reason is fear of a return to low prices and revenues when memories of the recent slump are still fresh. “The scars from the events of last year should teach us caution,” as the Saudi minister said on Feb. 17.

But producers also have a financial incentive to err on the side of caution. Under-forecasting consumption and over-forecasting production leads to a rise in prices and revenue windfall.

“If we have to err on over-balancing the market a little bit, so be it. Rather than quitting too early and finding out we were dealing with less reliable information … stay the course,” Saudi Arabia’s previous oil minister said almost exactly three years ago in February 2018, when prices and spreads were at the same level they are now.

Rising prices are beneficial for government finances in the short term, even if they create the conditions for over-production and another slump in the long term.

The result is that it is quite normal for OPEC to be wary of raising output at this stage in the cycle – even as prices rise, inventories shrink and the market moves into a pronounced backwardation.

OPEC’s slowness in raising production typically causes inventories to fall below average, and prices to overshoot on the upside, until a rise in output from non-OPEC producers causes prices to peak and then start to fall.

OPEC+ RESPONSE

Speaking this week, the Saudi oil minister had a warning for any traders or analysts trying to guess how OPEC+ will respond to the recent rise in prices:

“On the subject of predictability, this also applies to those who are trying to predict the next move of OPEC+. To those I say – don’t try to predict the unpredictable.”

In fact, the outline of the price cycle and OPEC+ responses to it are both broadly predictable, in the sense that they follow a regular pattern of moves.

Every price cycle is slightly different. Some slumps are triggered by recessions, others by volume wars. And OPEC+ ministers come and go. But the basic decision-making framework and incentives stay largely the same.

The precise timing and magnitude of peaks and troughs cannot be forecast because the market is a complex adaptive system that has some chaotic features.

But the broad pattern of rising and falling prices, production, consumption, inventories and spreads, as well as OPEC’s response to them, follows a familiar sequence.

The cycle can be split into a series of phases. The exact number is somewhat arbitrary and the phases can overlap and not be fully distinct.

The attached chart book shows both a basic 4-phase and a more elaborate 6-phase version, but it can be split into even more phases if necessary.

The recent fall in inventories, rise in spot prices, and shift towards a steep backwardation, indicate the market is moving towards a peak (Phase II in the six-phase version of the cycle) or peaking (Phase III).

In previous cycles, at this point OPEC’s resolution to continue restricting output would weaken (Phase II) and it would come under pressure to curb price increases by boosting production (Phase III).

The current upswing appears to be following the same pattern. In late 2020 and early 2021, several members of OPEC+ pushed for output increases and compliance appears to be fading for many members.

With prices surging, the organisation already faces increasing calls to start boosting output or risk a resurgence of drilling and production from U.S. shale firms.

With inventories shrinking rapidly, the speed with which OPEC moves from Phase II to Phase III is likely to determine the eventual timing and scale of the overshoot – as well as the timing and depth of the subsequent slump.

Reuters, by Barbara Lewis, February 26, 2021

The port city continues to bloom with its unique geographic location as one of the leading oil trading and bunkering hubs in the world.

Fujairah has raised its profile as one of the world’s leading oil trading and bunkering hubs by building world-class terminal and port facilities. Though high oil prices over the past decade were an important factor supporting investment in new energy-related infrastructure, Fujairah has multiple competitive advantages that allow its oil-related industries to operate successfully through cycles of low and high oil prices.

Fujairah’s unique niche is based on services related to trading and moving of oil. Its advantages can be classified into ‘hardware’, such as location and infrastructure, and ‘software’, such as the regulatory environment and the sophistication of the legal and financial sectors of the UAE to meet the requirements of the shipping and oil trading sectors.

Hardware

Even though oil price is low, more barrels of oil are being produced in the Arabian Gulf region – which is the target market of Fujairah’s storage and logistics terminals.

Fujairah’s position on the eastern coast of the Arabian Peninsula, adjacent to the Strait of Hormuz, is unique. The Port of Fujairah sits on a critical tanker and trade route linking Europe, Africa and Asia to the Arabian Gulf.

The port city is also the landing point for the 380 km Habshan-Fujairah crude oil pipeline, which provides Abu Dhabi with an export outlet on the Arabian Sea coast, thus cutting down travel time for tankers that would otherwise have to sail through the narrow and busy Strait of Hormuz to load their cargo.

The wider Arabian Gulf region holds the reserves of large national oil companies, which manage the world’s most attractive hydrocarbon reserves.

The Emirate of Fujairah benefits from utilisation of its infrastructure – comprising an oil tanker jetty and 8.8 million cubic metres of storage capacity to date and expected to climb to 14 million cubic metres by 2018. In this respect, it must compete with other world-class oil hubs for its customers, who are oil owners whose products are handled in Fujairah. These include 14,000 vessels, which anchor in Fujairah waters and the major national oil companies including ADNOC, ENOC, SOCAR, Sinopec that move physical oil in the region.

The Port of Fujairah is working with its oil terminal partners to construct a VLCC jetty that can accommodate the world’s largest tankers.

The Port of Fujairah is planning to invest $304m (Dh750m) over the next two years to expand and upgrade its oil-handling infrastructure. With the investment, the port supports the Fujairah government’s strategy to provide job opportunities to UAE nationals as well as help boost various economic sectors in the country.

Future projects planned for Fujairah include the construction of additional refining, petrochemicals, and LNG import terminals that can complement the existing energy-related infrastructure.

Software

In addition to the world-class infrastructure, Fujairah has other characteristics conducive to the development of an oil hub such as a strong marine services market, which attracts fleet operators to bunker in Fujairah waters.

As part of the UAE, Fujairah is a respected safe haven that affords international oil traders confidence that their vessels, cargoes, and contracts will be protected within a stable legal and regulatory framework.
UAE’s sophisticated financial services sector is capable of meeting the large-scale working capital requirements of the shipping and oil trading sectors.

Risk Management

As oil prices have come down, global oil inventories have risen close to 3 billion barrels, according to the International Energy Agency. A ‘contango’ market that anticipates higher future prices also contributes to utilisation of oil storage infrastructure.

To navigate such oil price volatility going forward, the key for the owners of these oil stockpiles, who are also customers of Fujairah’s infrastructure, is risk management discipline. Build-up of inventories would be a speculative exposure.

Therefore, traders will have to protect themselves by balancing their physical positions with contracts to hedge price risk and lock-in acceptable margins with creditworthy counterparties.

Banks who lend to the energy industry must also understand the dynamics of their customer’s business and help clients actively manage risks through the market cycles. For example, National Bank of Fujairah’s treasury desk is active in helping its energy sector clients protect against price swing risks and structure inventories into hedged assets.

At the right place, at the right time

Oil price dynamics are difficult to predict, and investment decisions in the industry are examined very closely. Fujairah’s investment outlook is built on strong fundamentals. The world continues to consume more oil and the Arabian Gulf region also continues to produce more oil.

With its superb location, excellent oil infrastructure and increasingly sophisticated financial services sector, Fujairah will continue to raise its profile as one of the world’s leading oil trading hubs.

Upcoming projects

Fujairah is developing several government, oil and gas, infrastructure and housing projects. One of the most prominent is that of Dibba Fujairah Port. Two 650-metre docks with an 18-metre depth and cranes with a capacity of 4,000 tonnes per hour are being constructed.

“The development of the port at an overall estimated cost of Dh1.6 billion aims to facilitate the transportation of primary materials, to meet growing global demand and the requirements of all types of ships,” said His Highness Sheikh Hamad bin Mohammed Al Sharqi, Member of the Supreme Council and Ruler of Fujairah. The multi-purpose commercial port is expected to complete by the end of 2022.

The construction of the Dh1.9 billion Mohamed bin Zayed Residential City was completed last year. It will accommodate 1,100 residential villas equipped with advanced facilities, with the aim of providing housing for about 7,000 citizens. It will also include schools, mosques, parks, and commercial stores, community cultural centre and a men’s council.

The region is also anticipating the inauguration of the Etihad Rail project, which is expected to strengthen its economic sectors through the establishment of three stations starting with Khatmat Al Malaha Station that will link the UAE to Oman, Fujairah Station and Khor Fakkan Port Station.

The Ministry of Energy and Infrastructure in coordination with the local authorities in the Emirate of Fujairah recently opened, the Najimat tunnel, which will contribute to the smooth flow of traffic and raise the efficiency of Sheikh Hamad bin Abdullah Road.

The Fujairah F3 Independent Power Project was the winner of the Power Deal of the Year. The project includes the construction of a 2,400 megawatt combined cycle power plant. All generated power will be sold to the Emirates Water and Electricity Company under a 25-year power purchase agreement. It is due to start commercial operation in April 2023.

Khaleej Times, February 25, 2021

The oil, gas and chemical industries have always been quick to respond to macroeconomic changes. Demand for these three products is therefore an important indicator for economic development. Vice versa, the market for oil and chemicals is heavily influenced by socio-economic trends. While the impact of Covid-19 on the global economy obviously is enormous, there are also other key factors to consider when creating a market outlook for the oil and chemical industry. In this blog, we share our predictions regarding changing supply/demand imbalances in liquid bulk and their impact on the storage markets.

Electric vehicles on the rise

Over the past few years, the market for electric mobility has seen incredible growth. In 2019, the global electric car fleet exceeded 7.2 million, up 2 million from the previous year. With more and more electric car models being introduced to the market and charging infrastructure improving, this strong growth is only expected to increase. The IAE estimates that by 2030, there will be over 250 million electric vehicles (excluding three/two-wheelers) on the world’s roads. According to the IEA, the projected growth in the Sustainable Development Scenario of electric vehicles would cut oil products by 4.2 million barrels/day. (source)

Effects of lockdowns on fuel consumption

When we zoom in on North-Western Europe, the market outlook for the oil and chemical industry is poised to see some significant shifts over the coming years, especially regarding fuels. The ongoing move to sustainable energy sources aside, the demand for road and jet fuels has, of course, been strongly influenced by the ongoing Covid-19 pandemic. While the short-term effects of national lockdowns on demand for fuels are relatively straight-forward (fuel consumption is strongly linked with people’s mobility patterns), it will be the longer-term effects that are the most interesting to keep an eye on.

The ‘new normal’

Any economist will tell you that human behavior is notoriously hard to predict. Still, experts agree that the pandemic most likely will lead to a subtle yet noticeable shift in consumer behavior and travel habits.

Large corporations like banks, IT companies, and insurers are already preparing for a ‘new normal,’ where their staff will work more from home after Covid-19 than they did before. While the technology and infrastructure for remote working have already been in place for the past few years, both office workers and their employers have now experienced that it is possible to work from home at a large scale. Online meetings via Teams or Zoom have shown to be viable alternatives for in-person meetings. That’s not to say that face-to-face meetings at an office have become a thing of the past, but the advantages of online meetings have become more apparent.

As it could be that people will commute less to their offices, a decline in overall car traffic volume is expected. Together with the ongoing electrification of road vehicles, we expect that the current surplus for gasoline will increase further. When we take a look at diesel consumption, reversed dieselization of passenger cars will lead to a faster decline than we will see for gasoline. That being said, because the electrification of trucks is not expected to happen in the coming years, there will still be a large volume of diesel consumption left. 

While the positive experiences with online meetings now offer a financial impulse for reducing business air travel, it’s currently difficult to forecast if people will fly for private purposes as much after Covid-19 as they did before. Nonetheless, the longer the pandemic drags on, the more significant its long-term impact on aviation will be. That’s why for jet fuel, we forecast that the current deficit for North-Western Europe will grow at a slower pace.

What’s next?

It is clear that the transition to sustainable fuel sources will greatly impact the tank storage terminals. The market outlook for the oil and chemical industry will see significant shifts in supply and demand, while the Covid-19 pandemic only adds further complexities to the market. That’s why market intelligence should be on the radar of every terminal operator.

During our regular Market Update webinars, we offer our expert outlook on supply, demand, and trade flows and their impact on tank storage demand. 

Do you want to make sure that you never miss out on important market updates? Sign up for the next webinar today, so that you are better prepared for what tomorrow will bring.

Oil and gas plays a key role in running our world, from powering homes and businesses to keeping the transportation infrastructure running. Our lives wouldn’t be the same without oil and gas.

Consumers can easily spot price fluctuations within the oil and gas industry, from filling up our tanks at the gas pump or sticker shock on our utility bills during the winter and summer months. These price changes may seem meaningless at times, however, several factors influence increases and decreases in oil and gas pricing. There is more to it than supply and demand.

If you are considering investing in crude oil, understanding the factors which affect oil and gas prices will give you a more solid foundation for your investing activities.

There are four primary factors that affect the price of oil and related products worldwide. These factors include:

Demand
As with any commodity, one factor that dictates price is demand. The world demand is around 90 million barrels per day for crude oil. Many countries have fuel subsidies for their residents. This can be good or bad. It’s especially bad when a company is forced to sell at a loss.

Supply
Supply has an effect on price. Supply is usually kept slightly below demand by about one million barrels per day.

Forbes, Editor: Jay R. Young, January 27, 2021

BCOM, GSCI seen adding about 100,000 crude oil contracts. Annual re-balancing begins Friday and will last for five days

Tens of billions of dollars worth of commodity investments are about to be switched around in a move that’s set to cause a wave of oil-futures buying.

While the move happens every year, crude’s 20% decline in 2020 means that the value of oil index investments has been far below its target for months. As a result, as much as $9 billion of oil contracts could be purchased over the five days of re-balancing that start Friday, according to Citigroup Inc., at a time when the market is already surged to 10-month highs.

The move affects the world’s two biggest commodities indexes — the S&P GSCI Index and the Bloomberg Commodities Index. Crude has recovered from its coronavirus-driven rout and so far this year has been benefiting from Saudi Arabia’s unilateral output cuts, a surge of investments to hedge reflation and coronavirus vaccines. Markets are now abuzz with talk of the next tailwind for prices: commodity indexes plowing into another 80 to 100 million barrels of crude futures contracts.

“It’s a big deal,” said Gary Ross, a veteran oil market watcher and chief executive officer of Black Gold Investors LLC. “If you start increasing financial length by 80-100 million barrels, you push up the price $2-$3, all other things being equal.”

Investment products that track the S&P GSCI or BCOM are followed by billions of dollars in passive, long-only funds such as pension funds. Bloomberg Index Services Limited, the administrator of Bloomberg Indices, including BCOM, is a wholly-owned subsidiary of Bloomberg LP.

Buying Trigger
Estimates of the exact size of the inflows vary significantly. That’s because the figures are based not only on a product’s weight within the index, but also their total assets under management and how actively traded they are. For BCOM, the weight of most contracts will increase, except Brent and Nymex gasoline. For S&P GSCI, oil contracts will see a lower weighting, despite WTI remaining the largest constituent part.

What matters, though, is investment flows. While weightings might drop, the dollar value to maintain the new weightings might need to rise. And that’s what would trigger the contract buying.

Citi’s estimate assumes that BCOM and S&P GSCI both have about $100 billion of investments. Still, JPMorgan Chase & Co. said last month that it only expects about $3 billion worth of buying in the market as crude’s rally up toward $50 limited some of the additional purchases required.

There are some big unknowns about exactly how the process will play out. One is that investors and traders, aware of the re-weighting, may already have been pre-empting it. Another is the total dollar value of the commodity assets that funds will have under management, which will dictate the scale of investment flows.

RBC Capital Markets estimates that there will be about 80,000 Brent and West Texas Intermediate contracts bought during the re-balancing.

“This buying pressure across the complex should serve as a tailwind and help fortify the improving oil market sentiment,” RBC analysts Helima Croft and Michael Tran wrote in a note.

Bloomberg, Editor: Alex Longley, January 27, 2021