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The global oil market seems to be well stocked, even as OPEC + production cuts begin to ease for excess barrels. But if the crude can be abundant, the market of refined products, especially the emergence of an overabundance of gasoline, poses more and more problems.
The bottom line is that the supply of gasoline is increasing, while the market for other products is narrowing. There are several reasons for this. First, the raw slate itself contributes to creating these imbalances. The increase in American shale production has made the global raw mix lighter and sweeter. The mild sweet oil tends to produce relatively more gasoline when it is refined. Medium and heavy oils produce more diesel and other middle distillates and less gasoline.
Shale production has increased in recent years, leaving refiners with cleaner crude. At the same time, due to the skyrocketing of shale production, OPEC + is dropping barrels to avoid an overabundance of crude oil. But many producers in the cartel produce medium and heavy barrels. Thus, light oil from American shale is climbing while medium and heavy barrels are retained.
There are still a few factors behind the discrepancy in the raw table of contents. Venezuela has suffered sharp declines for more than a year. The South American member of OPEC produces heavy oil. Any unforeseen interruption in Venezuela due to the current political crisis in that country would amplify these trends. Mexico, another heavy oil producer, saw its output deteriorate for years, but at a slower pace than Venezuela. Iran too is losing reserves. Related: The most important oil factor in 2019
Once again, the result is that light oil from American shale has emerged at a time when the biggest producers in the world have seen declines. Heavier and acidic crude oils, which historically traded at a discount, are facing upward pressure on prices. "Acid [crude prices are] strong because the West is a net sour, "said a Singapore-based trader at S & P Global Platts.
The effect on the product markets is even more striking: gasoline prices are falling, but those of diesel and other distillates are trading at a higher price. While refiners may be able to modify their inputs somewhat, the way in which they adapt to the changing composition of crude oil is limited. Some refiners are simply more equipped to process heavier oils, others can handle lighter blends.
Nevertheless, as product prices deteriorate, refiners are trying to increase their stocks of diesel and other distillates. But, with more diesel comes more gasoline. Refiners simply can not produce one without the other. As a result, while refiners are looking for barrels of diesel, they are dumping more gasoline into the global market, exacerbating the nascent glut.
The "overabundance of gasoline continues to worsen," said Friday the US investment bank Jefferies in a note.
"Last week, gasoline inventories reached their highest level since the start of records, so it's not surprising that crack spreads for gasoline are under pressure," he said. Commerzbank wrote in a note on Friday. "Cracking margins in the United States reach a minimum of $ 5.5 per barrel in five and a half years, while in Europe they are even negative." European refiners are struggling to find housing for their essence, reports Bloomberg. Related: Canadian heavy crude oil producers discover new ways to ship oil
There are even more reasons for the disruption of the oil supply mix. The International Maritime Organization (IMO) has marine fuel rules that will come into effect in early 2020. These rules require ships to significantly reduce the sulfur content of their fuels. This means that the ships will have to stop working with heavy fuel oil, rich in sulfur. To replace the dirtier fuels, many ships will switch to middle distillates. This could ease the pressure on heavier acid oils, but could also put even greater pressure on diesel and diesel supplies (another distillate).
At one point, refiners may no longer be able to take more light oil if they reached a limit. "If you badyze the world's refining system, it is designed to take a certain percentage of light crude oil that can not be changed dramatically," said Pedro Antonio Merino Garcia, chief economist at Repsol, at the Summit Argus Americas crude oil in Houston, Texas.
Ultimately, this means that refiners may have to reduce their treatment rates, which would reduce demand for crude oil and potentially lower their prices.
By Nick Cunningham from Oilprice.com
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