A weekly look at what occurred in the oil markets of the U.S. and the world this past week.
Oil can be sweet (low sulfur) or sour (high sulfur). It can be heavy or light, which is pretty much what it sounds like. But this past week, a new term entered the lexicon – infected. And it could pose a threat to U.S. crude exports.
In an article published Wednesday, Bloomberg said South Korean refiners have turned away two cargoes of crude exported from the U.S. because they had an unacceptable number of impurities. “Specifically, refiners are worried about the presence of problematic metals as well as a class of chemical compounds known as oxygenates, which can affect the quality and type of fuel they produce,” the article said.
Oxygenates are found in gasoline; ethanol is an oxygenate for example. And crude from other areas isn’t pure. But as the article notes, a barrel of oil coming from North Dakota to be exported is more likely to mingle with other grades of crude, residue of other blendstocks in pipelines and other impurities. It’s a formula for oil being more of a blend than anybody really wants.
However, the crude that was rejected by the two South Korean refiners was from the Eagle Ford field in south Texas, a crude that generally has fewer miles to travel to its export point, which is often Corpus Christi, Texas.
But this doesn’t mean the end of U.S. exports; they may not even be affected by them. The article quoted an official from Hanwha Total Petrochemical Co. of South Korea as saying U.S. crude exports have simply become too important, even in Asia, to just be ignored. As the same article states in quoting John Driscoll, a long-time oil consultant operating out of Singapore, U.S. exporters “need to tighten up the specs or face pressure from buyers for further discounts.”
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As we’ve noted previously, the risk to diesel markets in the switch to IMO 2020 is not what might happen two to three years down the road. There are models that realistically set a path for how the industry can displace about 3.5 million barrels per day of high sulfur fuel oil now used to power shipping and replace it with lower sulfur fuels including new blends of very low sulfur fuel oil, or VLSFO. (Though to make those new blends of VLSFO, intermediate products used to produce diesel will need to be consumed in the process.)
The concern is what happens later this year when the switch begins in anticipation of the January 1 launch of IMO 2020. It has been said by various officials that there is likely to be a “flight to safety” – ship owners burning low sulfur marine gasoil (MGO) or marine diesel (MDO), which both come from the same distillate pool that supplies over the road diesel. That is not something the models are preparing for. It’s short-term and it’s not likely to be permanent. But ship owners are concerned about the quality of the VLSFO and want to test it before jumping in feet first.
There was more affirmation of that this week in an article that came out of a bunker fuel conference in Fujairah, UAE. An article published by S&P Global Platts quoted the CEO of Glander International Bunkering, Carsten Ladekjaer, as saying MGO/MDO is likely to be the first route shipowners will take as 2020 nears.
“I do have some concerns, especially for the initial transition phase going into 2020,” Ladekjaer was quoted as saying. He spelled out a long list of decisions that need to be made, and the mere fact that he’s saying they haven’t been made yet does raise the prospect of trouble during the transition. “If you are a refinery, you have some big decisions to make,” he was quoted as saying. “Should you invest heavily in upgrading without knowing future demands and further changes in legislation? If you don’t, can you sell your current product menu and at what price?”
The reality is that there have been refinery changes and key companies have announced plans to make VLSFO. But given that IMO 2020 is being called the biggest change in oil product specifications since, well, maybe forever, they’re relatively limited in scope.
Markets usually find a way, as Ladekjaer noted. “Despite the challenges, Ladekjaer said he was ‘convinced’ that most issues will be sorted out over time, as technical knowledge and experience in the market evolves and the market adapts,” the article said.
But will they be sorted out by January 1 and will the industry turn to old standbys MGO/MDO to get them through? That’s the issue…and the fear.
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It has happened 12 times: Donald Trump tweets that oil prices are too high and OPEC should do something about it, and markets go down. They eventually come back up but there has been a theory – named the “Trump put” by economist Philip Verleger – that trader fear of a Trump tweet might make some of them reluctant to go long in the market. That fear, according to the theory, might have been keeping a lid on prices.
After what happened Thursday, one has to think that the effect of a Trump tweet on oil prices may be exhausted. The possibility of doing it too often was always going to be a factor; if the President of the United States tweeted about OPEC every day, the price of oil was not going to $20.
As it was, a Trump oil tweet that came out when the price of oil was about $59.10/barrel (b) dropped the price to about $58.20 in rapid order. Two hours later, the drop had been erased. By the start of the next day, the $60/b level had been breached.
After the tweet came out, S&P Global Platts said that its sister company in artificial intelligence – Kensho had calculated that the average decline in the price of oil five days after the tweet was just slightly more than zero. Still, that doesn’t discount the impact it might have had on markets; Kensho calculated that a day after the tweet, the price was down an average of 0.4 percent, which is not a huge amount but is certainly enough to have given some traders pause who might otherwise look to buy the market.
But Thursday’s dismissal of the tweet was so fast and so thorough that it may be signaling traders are going to view Trump-related tweets on oil as irrelevant. Or as legendary oil analyst Ed Morse of Citi said, in a very analytical way, “Even on an intraday basis, the amplitude of the response is lower than the last time and may be discounting the immediacy of any producer action of adding barrels back to the market for now.” In other words, what’s going on in the market mattered and the Trump tweets became background noise. If that’s permanent, it’s a significant change.