Although prices are still considerably lower compared to last year’s highs, it is an encouraging sign. IEA numbers released recently showed a decrease in OPEC production of just under 1.2 mill barrels per day from October levels, a cut increase of almost 400,000 barrels per day, due to over compliance from producers, such as Saudi Arabia.
When also taking non-OPEC production cuts into consideration, the total cut for January totalled over 1.3 mill barrels per day.
This production cut was larger than many analysts predicted, leading to a belief that crude oil prices could continue to rise this year, Gibson said.
Production cuts and US sanctions, together with the escalating Venezuelan crisis, all helped to support sour grade prices.
Heavy grade crude shortages emanating from the Middle East and Venezuela had already caused the Oman crude price to overtake Brent. With a tighter sour market, refiners were forced to look towards Atlantic Basin crudes to plug the gap.
Geopolitical uncertainties surrounding crude production and demand were absorbed throughout 2018. However, recent events, plus producer and refiner indications, may be a bridge too far, Gibson said.
Recently, Saudi Arabia’s energy minister said that production would fall below 10 mill barrels per day in March, more than 500,000 barrels below the target the producer had initially agreed.
When this is coupled with the surprising news that US crude inventories had fallen by almost 1 mill barrels instead of the 2.7 mill barrel build predicted, crude prices showed their sensitivities to market fundamentals.
Pressure on supply towards the end of this year could potentially also affect prices, as 2.6 mill barrels per day of new refinery capacity due to come onstream will drive extra demand for crude.
Furthermore, refineries trying hard to produce middle distillates ready for IMO 2020 are expected to produce a large build of light end products to chase anticipated strong middle distillate margins.
Any overhang in supply of light ends could mean refinery throughput will have to ease in order to run down stocks. However, potentially bullish distillate margins could mean that refineries might not be planning any cuts soon.
US refiners have already said they will not slow down refining, due to current generous diesel and jet cracks, even though gasoline stocks sit at record highs. Current US Gulf Coast ULSD has a $27 per barrel premium over WTI, compared to a $7 per barrel gasoline premium.
Added to new refining capacity, means that global refinery runs in the third quarter of this year are predicted to surge to 84 mill barrels per day.
Apart from the obvious increase in bunker prices, higher prices could also have a negative consequences for oil demand growth, which would have a bearish impact on the tanker market in the long run.
However, uncertainty over whether enough compliant fuel oil will be produced in time for 2020 and new refineries coming online should see a strong rebound in crude runs, supporting short term tanker demand.
This could cause refineries to push even harder should substantial margins be offered, Gibson concluded.