A key question for any market during times of uncertainty and volatility is what is happening to liquidity?
Over recent weeks commodity prices, and particularly oil markets, have seen unprecedented volatility. Although the forward view may become clearer, there is still huge uncertainty around fundamentals in the months ahead. S&P Global Platts has a unique insight into several key commodity markets through its Market on Close (MOC) assessment process.
The MOC is the core process through which Platts assesses several commodity benchmarks. This involves companies submitting firm bids, offers and trades for publication in a transparent environment across a range of commodities including crude, oil products, biofuels, metals, petrochemicals and LNG. The process is voluntary, and the data it generates is by no means a complete summary of all spot physical activity. But it is extensive and significant.
By analyzing the MOC data of the last few weeks, several key points have become apparent. The first and perhaps most important conclusion is that there remains a very healthy flow of spot market trades, despite reported spot physical market activity around the world taking a hit from the current crisis.
Although commodity markets are now understandably focused on gasoline and jet fuel, just two months ago the core focus was very much on the impact of the IMO cap on sulfur in marine fuels. In January there was a 14% year-on-year global decline in reported physical trades. But the bulk of this decline came from fuel oil and middle distillates in Europe – both areas where the uncertainty around the implementation of the IMO cap was likely causing a more measured approach to physical trade.
In February, the global trade tally was up 16%, with the gains coming from fuel oil and distillates – likely reversing January's slowdown as the market came to grips with IMO.
And so to March, where the "sea of red" in commodity prices is equally evident in reported trade activity. Globally, physical trades look set to be down around 31%, based on data up to March 27. As expected, the biggest fall has been in Asia, down 39%. Europe is close behind, down 34%. Perhaps echoing the regional journey of coronavirus, US physical trade is yet to feel the full impact of the crisis and is down just 8% from 2019.
In absolute terms, the volume of trade reported remains high, however. Through March 27, 64.8 million barrels of physical trades were reported, which equates to roughly 71 million barrels for the full month, or around 3.2 million b/d. So, commodity markets remain active, and vibrant.
Within the big picture there are plenty of useful details. The IMO story for fuel oil has continued to play out, with physical fuel oil barge trades in March set to jump 118% year on year to over 4 million barrels. Similarly, the LNG spot market continues to grow, with physical LNG trades reported in the MOC process reaching 1.2 million barrels of oil equivalent up to March 27.
Those markets are in effect going through changes unrelated to the coronavirus crisis, and the pandemic has not stopped this evolution.
Of course some fuels have been hit very hard by the sharp decline in global transportation, primarily gasoline and jet fuel. Both markets are now massively oversupplied, and prices have fallen rapidly. But that has not led to a collapse in spot trading, and in several key locations there has actually been an increase in spot trade. This may seem counter-intuitive, but it is logical. When markets are oversupplied sellers need to find any buyers they can, and the spot market becomes a key, if not the only, outlet.
Hence reported gasoline cargo trade in Asia is up 28% year on year in the month to March 27 at 4.3 million barrels, though trades were down in Europe and the US. There may be few planes in the skies above Singapore this month, but plenty of cargoes of jet fuel are still changing hands. So far, 1.6 million barrels of jet fuel has traded in the month to March 27, up from 300,000 barrels in the full month a year ago.
Physical crude trade hitHowever, the picture is not all rosy. Crude oil, the most significant commodity market, is also the one facing the greatest uncertainty. The crude market has been hit by plummeting demand and millions of barrels of new supply. The market is despairingly oversupplied, and at the mercy not just of the world's health, but also a price war between producers.
In such circumstances, unsurprisingly physical crude trade has dropped back. In the Middle East, reported trades of Dubai crude partials look set to be just under 4 million barrels for March, which would be a year-on-year decline of 40%. Similarly, North Sea crude cargoes (Brent, Forties, Oseberg, Ekofisk and Troll) are down by a similar percentage, at 7.2 million barrels to March 27, implying close to 8 million barrels for the full month.
But physical trades are not the whole picture. Bids and offers, and the changes to them, in fact make up the greater share of information in commodity markets. Looking at this more granular data, we can see that Dubai crude was extremely active throughout March. The total number of price changes to bids and offers was a weekly average of around 500 in January and February. But in the week ended March 20, that figure was 590, the highest for the year so far. Within this total, there was a stark change from the start of the year. In January, bids and offers were roughly equal in number. By March 20, offers outnumbered bids by more than seven to one.
The data continues to change, and we will no doubt see further swings in prices and liquidity as the crisis develops. But the key point for now is that the commodity markets are operating close to full pace during a period of unprecedented stress.