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Insight Weekly Market Report Market report - 28.05.2024

Market Report Week 22 - 28.05.2024

Other insights May. 28, 2024
Market Report Week 22 - 28.05.2024 Download the report here

Summary

This week sees the release of various confidence and sentiment indices. Argentina's consumer confidence is slowly recovering amid significant reforms. Personal financial prospects have improved. German consumer confidence rises from historically low levels to a two-year high. In the US, the Conference Board's consumer confidence index is expected to fall for the fourth consecutive month to above 94. Consumer confidence in the eurozone and Japan improves slightly but remains low. Economic confidence in Turkey is rising despite high inflation, and Italian business confidence and economic sentiment in the euro area are also rising slightly. Korean industrial production is expected to have risen by 1.1% in April, while Japanese industrial production fell by 4.3%. US Q1 GDP growth is revised down to 1.6%, with Q2 personal consumption expenditure prices rising to 3%. India's Q1 GDP growth is forecast to slow from 8.4% to 6.7%.

In the oil market, the Baker Hughes oil rig count was unchanged at 497. WTI averaged $78.2, down slightly on the week, while Henry Hub natural gas prices rose to $2.68/mmbtu. The upcoming OPEC+ meeting is expected to extend voluntary production cuts. While OPEC countries have been overproducing, a reversal of cuts is needed to avoid a large drawdown in inventories. Saudi Arabia plans to sell another tranche of Aramco shares. Goldman Sachs expects oil demand to peak at 110 mb/d in 2034, slightly below OPEC's forecast but above the IEA's.

The Dutch Central Planning Bureau's World Trade Monitor for March shows a slight decline in world trade from February. Imports fell in all major economies except Japan. Exports also fell, especially in China and emerging Asia. German trade remains crucial despite falling exports to China. European finance ministers are stressing the need for a united front against China's industrial policies and warning of possible trade wars. Germany, which is heavily dependent on Chinese trade, would face significant GDP losses from an abrupt decoupling.

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Oil

- OPEC+ countries have pledged nearly 5.9 million barrels per day (mb/d) of production cuts, about 5.7% of global demand, but overproduced by 0.5 mb/d in April 2024.

- The actual reversal of cuts would be 2.2 mb/d, primarily from Saudi Arabia, Russia, Iraq, Kazakhstan, and UAE, but many of these countries are already producing above their pledged levels.

- Mexico and other countries have limited capacity to increase output, making Saudi Arabia the primary source of the potential production boost.

- Saudi Arabia is also planning to sell another tranche of its shares in Saudi Aramco, which might provide updated information on the company's oil reserves.

 

- Goldman Sachs predicts oil demand will peak at 110 mb/d in 2034, which is lower than OPEC's forecast of 116 mb/d in 2035 but higher than the IEA's peak estimate of 106 mb/d in 2028. The market is watching the June 2nd OPEC+ meeting for potential extensions of voluntary production cuts.

 

The Economy

- According to the Dutch Central Planning Bureau, world trade decreased by over 0.5% in March compared to February. However, February's figure was revised upwards to a 1.6% increase, distorting the headline number.

- Year-on-year, global trade is down nearly 1%. Imports decreased in large advanced economies except for Japan, with the Eurozone, US, and UK showing varying degrees of decline from February. China recorded strong imports, but exports fell significantly across all advanced economies except Japan.

- Global industrial production fell by 0.8% from January and rose 0.4% year-on-year. The Eurozone, Japan, and Africa/Middle East saw declines in output, while the US remained mostly flat and China increased by 4.5%.

- Germany's economy, heavily reliant on trade, saw a small GDP shrink of 0.1% in 2023 despite export growth of 0.6%. Trade with China declined, with the US becoming Germany's largest trading partner in December. Germany's trade surplus fell 10% from its 2019 peak.

- European finance ministers urged unity against China's industrial policies, warning of a potential trade war. Germany, France, and Italy emphasized the importance of a common front, with Italy noting the likelihood of the EU following the US in imposing tariffs. Germany's economy would be significantly impacted by any abrupt end to trade with China, causing a potential GDP fall of 3.5% to 5% in the first year.

 

Vessel rates

  • New York

    Seeing USGC HS crack strengthen, leading to a stronger premium on USEC HSFO RMK. Demand from liner segment still strong. Demand on spot basis on USEC is flat.

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  • Fujairah

    HSFO stocks at the Port of Fujairah remain ample versus a very tight end April and 1H May. Barge tightness has eased with the lead time for inquiries now 7-8 days to avoid a higher premium with limited slots for prompt inquiries. VLSFO remains very well supplied with plenty of cargoes in the market. Barge activity is limited with demand subdued with very prompt avails ok. This has weighed on bunker premiums with prices falling.

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  • ARA

    HSFO and VLSFO are still well balanced. MGO is still seeing problems with refineries, but avails can still be found.

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  • Singapore

    The LSFO market may face pressure from May 27-31 due to adequate supply meeting prompt downstream bunker demand, and traders anticipate increased arbitrage arrivals from the West will boost regional stockpiles. In Singapore, delivered premiums have weakened from slower end-user demand and rising regional competition, though LSFO cargo availability appears sufficient for late-May and early-June refuelling. Conversely, Asian high sulfur fuel oil (HSFO) prices remain steady due to tighter supplies and stable bunker demand, bolstered by increased imports from South Asia for summer utility needs. HSFO spot inquiries and term contract volumes support downstream premiums, with adequate early refuelling schedules expected. The Asian gasoil market may decline further as Indian exports head east amid weak domestic demand and unfavorable East-West arbitrage. Singapore's onshore middle distillate stocks rose 8.14% to 10.94 million barrels between May 16-22, recovering from a 10-week low of 10.12 million barrels.

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  • New York
  • Fujairah
  • ARA
  • Singapore

Forward Curves

3.5% Barges R'Dam Curve

Weekly Report 280524 Page 0035

The 3.5% barges’ curve is in contango for the first four months of the curve (one less than last week) and shows a $9.5 backwardation on the 6-month contract (front month minus the six-month contract). Contango is $5/mt at the two-month horizon and $3.5/mt at the three-month horizon. The front rose $2/mt while the six-month fell $2.3/mt.

VLSFO 0.5% R'Dam Curve

Weekly Report 280524 Page 0036

The VLSFO 0.5% backwardation decreased $7.8/mt to -$11.3/mt, compared to a week prior.

ICE Light Gasoil Curve

Weekly Report 280524 Page 0037

The ICE Gasoil curve fell $23.5/mt at the front compared to last week in absolute terms (May 24th compared to May 17th). The six-month fell by $19.8/mt. The curve is in contango but falls between the 5th and 6th month contract. The time spread for the 6-month period increased $3.8/mt to plus $6.3/mt.

VLSFO 0.5% VS LGO and 3.5% Barges

Weekly Report 280524 Page 0038

The relative value of VLSFO compared to LGO at 6 months flat at 70% and in absolute terms down $7 at -$225/mt compared to 72% or $208/mt below LGO at the front. That $208/mt is down $2/mt on last week’s reading when the front was at 72% of LGO also.

Weekly Report 280524 Page 0035 Weekly Report 280524 Page 0036 Weekly Report 280524 Page 0037 Weekly Report 280524 Page 0038

Our point of view

The “market” is expecting an extension of the voluntary cuts of 2.2 mb/d coming Sunday. As the news headlines say, this restraint is balancing the impact of higher for longer central bank interest rates. Those rates push demand down. As is usual, there is a mix up of longer-term processes and short-term processes and their effects. Production restraint impacts at a horizon of a few months. In case demand continues, stock draws will be observed, and prices will react. A partial reversal of the cuts will have an immediate effect on prices from expectations, and then real effects when the physical balance starts to shift. However, monetary policy takes much longer to work its way through. There is no objective way of measuring it. Yes, there will be a market reaction to an announcement of rate changes, but it takes well over a year before anything starts to happen in the real economy, especially if cuts are done in baby steps. And then there is the whole issue of how high an interest rate our current economic system can actually handle, given the debt load of governments and the large number of so-called zombie companies in the economy. A case can be made that the near zero rates were too high, but that the rates should be much higher to clear the economy. Neither will happen, and neither will the oil price move very much. Muddling through is what will be seen for some time. That said, some movement in the price is likely when the decision is substantially different from what the market expects.

 

Download the report here

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