Oil products prices rebound as stock markets rally on US GDP

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Focus article by Cuckoo James

LONDON (ICIS)–Oil products prices have rebounded close to levels seen a week ago and before the global stock market crash took place on Monday, as Brent crude oil futures rally on the back of a recovery in the equity markets, industry sources said on Friday.

“Growing up in Chicago we had this saying, “If you don’t like the weather, give it fifteen minutes.” This reminds me a lot of the oil markets this week. I think that the rally that started on Wednesday had to do with the surprise drop in US crude oil inventories,” said Carl Larry, director of oil and gas business development at Frost & Sullivan.

Front-month ICE Brent crude oil futures closed the day at $47.56/bbl on Thursday, up $4.42/bbl from the previous day’s settlement of $43.14/bbl. The benchmark steadied on Friday after opening at $47.40/bbl.

Sentiment in equity markets reversed on Thursday as investors revaluated US response to the stock market crash. Concerns over China’s economic growth led to a tailspin in the global equity markets this week and raised doubts about the prospects of an increase in US short-term interest rates in September.

On Wednesday, William Dudley, the head of the New York division of the US Federal Reserve remarked that a rate increase in September had become “less compelling.”

But the stock market rallied on Thursday as a higher-than-expected revision of the US second-quarter GDP growth to 3.7% helped reinstate confidence.

“After the stock draw on Wednesday we came in with some booming numbers on US GDP. That bolstered the idea that the record levels that the US refining system has been running is likely to continue and find itself up against some stiff capacity constraints in the new year. For now though it might mean that a lot of the planned maintenance for Fall may see some delays. That will keep crude supplies drawing down and support the price action,” Larry said.

The reversal in equity market sentiment is also augmented by breaking news in the crude oil markets.  Shell declared a force majeure on Bonny Light exports effective Thursday following the shutdown of both the Trans Niger Pipeline (TNP) and Nembe Creek Trunkline (NCTL).

“A leak was reported on the TNP at Oloma in Rivers State, while the NCTL is shut down for the removal of crude theft points. SPDC is working to repair and reopen the two lines as quickly as possible,” Shell said in a statement.

Northwest European naphtha prices bounced back by $28/tonne late on Thursday evening after trading firms Gunvor and Trafigura exchanged a cargo at $372/tonne cost insurance freight (CIF) northwest Europe (NWE).

European naphtha prices have been undermined recently both by a decline in upstream Brent crude oil futures and a weakening of market fundamentals. The Asian naphtha arbitrage window remains closed from northwest Europe although supplies from the Mediterranean are still heading east. 

European naphtha traders are concerned plastics demand would be less this year in China in the lead up to Christmas. Taiwan’s Formosa Petrochemical Corp (FPCC) reduced run rates from full capacity to 80% at its three crackers in Mailiao, traders said on Thursday.

Meanwhile, blending demand for naphtha is down as post-summer US gasoline demand is waning. A naphtha trader said: “You might be able to place some heavy [naphtha] that way, but for the light stuff [there is] no [demand]. They have enough themselves.”

Front-month ICE gasoil futures – against which middle distillates jet, diesel and gasoil barges and cargoes are benchmarked – rebounded by $21/tonne on Thursday evening to settle at $445.75/tonne.

Middle distillates demand rose this week on the back of the lower price and a strengthening of the euro. A distillates trader said: “[There] was good demand in the past days, based on low flat price and strong euro.”

At the bottom of the barrel, high-sulphur fuel oil prices increased by up to $21/tonne to a high of $202/tonne (FOB) free on board (ARA) Amsterdam-Rotterdam-Antwerp.

A fuel oil trader said: “Local demand is poor although prices are low.” Fuel oil is used as bunker fuel to propel ships.

Gasoline Eurobob barges rose by $2-10/tonne to $491-497/tonne FOB ARA, the lowest increase among oil products. Gasoline sentiment became bearish midweek because of weak market fundamentals.

Gasoline prices came off mid-week as BP released a statement on Tuesday stating that its key crude distillation unit at the Whiting refinery in the US was back online, weeks earlier than expected, a gasoline trader said.

The unit situated in Indiana had closed unexpectedly on 8 August for repairs.

In addition, US gasoline stocks rose unexpectedly by 1.7m barrels last week, according to the Energy Information Administration, indicating that peak demand driven by the summer travelling season might be drawing to a close.

On Friday, ICE Brent crude oil futures had given away some of the earlier gains, trading at an intraday low of $46.61/bbl by 14:50 London time.

“Alas, we’re back to reality today and a lot of the “irrational exuberance” is fading. We’re likely lower on expectations that global demand is still stuck in a rut.  I think that we’re going to continue lower in the next week or two, especially if the drop in imports was just a one week wonder. All the cards are on the table, we’re just waiting to see who is willing to play,” Larry said.