Crude bolstered by easing lockdowns in Europe, but product margin fears remain

New York — The European crude oil complex has seen a slight pick-up in buying interest this week, with the easing of lockdown measures encouraging refiners to take some prompt crude oil barrels straight into their systems, while opting to leave large quantities in both land and floating storage.

Yet oil product margins remain under stress amid a global oversupply of refined products and continuing fears about the frail state of end-user demand due to the coronavirus pandemic.

"Refineries want to be ready in case demand picks up," a source said. OPEC+ production cuts are also supporting the interest, as participants look to buy ahead of the supply disruptions.

Saudi Aramco was directed to cut its June oil production by 1 million b/d below its OPEC+ quota, to 7.492 million b/d, the official Saudi Press Agency reported Monday. This would be Saudi Arabia's lowest production level since June 2002, according to OPEC records.

However, with huge volumes in storage and pricing structure flattening, the price recovery could quickly grind to a halt as more barrels start being offered.

"It will draw out land storage if we are flat on structure and again, this will end the rally once traders get their act together and offer. But my thought is that refiners at negative margins will make the decision not to buy [these barrels] at these levels," a second source said.

Supply cuts

Many refineries in Europe are continuing to run under capacity or remain shut.

"Signs of refinery storage bottlenecks started multiplying at the beginning of May, with several refineries in Europe, Asia and Africa reported to be closed for an indeterminate period," the International Energy Agency said in its latest monthly report.

Refineries in France, Portugal and Turkey have halted or not restarted after maintenance due to weak demand, while a host of refineries have substantially reduced their runs, including in Germany, Italy and Spain, or moved maintenance forward, such as Shell's Dutch plant Pernis, according to S&P Global Platts data.

"Outages have spiked for the week ending May 8," according to Platts Analytics, whose analysts estimate that outages in Northwest Europe and the Mediterranean are "twice the typical level for this time of the year."

But while Platts Analytics expected further drops this week, it noted that outages are likely to start falling in the weeks thereafter.

In the latest sign that the situation might be improving, Italy's Falconara refinery restarted this week after being offline since late March as lockdown measures in Italy led to excess supply and large inventory builds. Refineries in France are gradually starting to increase runs as lockdown is eased and demand rises. Israel's Bazan said that as of early May "most of the severe traffic restrictions have been removed in Israel and according to the Ministry of Energy, the consumption of diesel and gasoline is returning to the pre-restrictions level."

The International Energy Agency expects globally "gradual recovery" to start in June and accelerate in Q3 after several countries end strict lockdown rules in May.

Margin fears

Fears about the weakness of end-user demand remain, however, despite the easing of European quarantines, pushing refiners to try to find a correct balance between supply and demand.

"We were pricing the purchase [of crude oil] against product cracks [and seeing] how hard we could run," a refining source said.

Refined products remain well supplied and they have not enjoyed the same level of recovery as crude oil.

According to another trader, diesel demand is far from recovery in Europe so the market will remain oversupplied for a while and refineries should continue to run below capacity.

"Margins in Europe have been getting worse not better, even though demand should have bottomed," the trader said, adding that with crude prices recovering they are "no longer supporting margins via the dated structure."

"[Hence] I am not convinced that the refining system will ramp up just due to demand improving," the trader noted.

Despite the fuel oil complex seeing less of a demand impact from the coronavirus pandemic due to its use in marine fuel, with most global trade shipped on the high seas, demand recovery to pre-coronavirus levels is expected to lag behind that of some other products following the easing of national lockdowns, sources said.

"I presume [demand] should pick up with a lag, but also runs might pick up and then supply will increase," a fuel oil source said. Sources reiterated that supply remained healthy in the markets.