NWE oil product cracks slump versus buoyant crude futures

London — Strength in the ICE Brent futures market following the recent rise in tensions in the Middle East has sent product cracks tumbling in Northwest Europe.

Notably, the FOB ARA ultra low sulfur diesel crack versus Dated Brent shed $3.23/b in two sessions to be assessed at $13.09/b Monday, while jet cracks fell $2.52/b to $12.89/b Monday over the same period. The Amsterdam-Rotterdam Eurobob gasoline crack fell to $3.21/b Monday, from $4.92/b on Thursday.

"[The crack moves] are mostly crude moves," one trader said Tuesday

European oil product flat prices have been relatively steady over the period. FOB ARA ULSD diesel barges rose to $618.75/mt Monday from $614.00/mt Thursday and CIF Med ULSD cargoes were up $3.00/mt to $625/mt.

Crude futures were lower at midday in Europe Tuesday as no immediate threat to oil supply had emerged.

"The moves are sentiment driven," a second trader said.

FUEL OIL

Fuel oil cracks have been the one exception, having risen since January 3 on support from IMO 2020 -- the lower sulfur cap on marine fuel globally since January 1.

On Monday, the 0.5% crack was assessed at $23.53/b, up more than $1.20/b in three sessions.

Since IMO 2020 preparations began in earnest in the fourth quarter, fuel oil has bucked the trend of other refined products and seen a disconnect from the traditional inverse relationship between crude prices and refinery margins.

Similarly, 0.5% fuel oil barge prices have risen in the past few days, but to a lesser extent than Brent futures. FOB Rotterdam 0.5% marine fuel barges rose $8.25/mt from Thursday to Monday, while the movement in Brent futures equated to $19.60/mt.

Similar movements have also been seen in with high sulfur fuel oil, which has also witnessed a $1.20/b strengthening in the crack.

SLUGGISH PRODUCT DEMAND

The middle distillate complex is trudging through a period of low demand for heating on mild winter temperatures, low demand for road fuels and air transport demand, amid a large loading program for diesel from Primorsk and flows from Asia.

"The diesel barge market has not been strong in the last few weeks. There is very little heating demand, it is not surprising that the structure switched into a contango...everybody is waiting for shipping demand to boost 0.1% gasoil," a trader said.

The lack of demand has been reflected in the structure between January and February ICE low sulfur gasoil futures, traders said. The January and February contracts were holding a $1/mt contango structure at midday.

Another source said distillate refining margins have come under pressure of late due to especially strong supply coming out of the Baltic Sea where the "program for January is big. With all the product being offered" cracking margins have come under pressure, he said.

The ULSD export program from the Russian Baltic port of Primorsk has been set at 1.614 million mt in January, up 28% on December but down 9% year on year.

Meanwhile, jet cracks, which had been weak due to a lack of kerosene demand for heating, could see demand further eroded if travel to the Middle East is affected. "Demand in the region will be down. People won?t want to fly to Dubai, in range of Iran," a trader said.

Looking at gasoline, values have failed to be supported despite the limited supply of products in Europe amid a slew of refinery outages and strikes through much of Q4 2019 and into the new year. Cracks have struggled to see support as geopolitical tensions and crude oil have taken the lead.

-- Staff, newsdesk@spglobal.com

-- Edited by Dan Lalor, daniel.lalor@spglobal.com