Publications: Notes at the Margin

Products to Crude's Rescue (February 24, 2020)


Crude prices recovered last week. Dated Brent rose by $1.50 per barrel, while cash WTI went up $1.30. The increases occurred despite strong evidence that global inventories were rising. Indeed, traders were aggressively chartering VLCCs for storage, paying, according to one source, $20,000 per day for older ships ($0.30 per barrel per month) and twice that sum for newer ones. Clearly, plenty of capacity was available.


Tight product markets principally explain the absence of a market rout. Gasoline prices in the United States have increased by almost fourteen percent during February, while distillate prices have risen by seven percent. We attribute the higher gasoline prices to accidents at refineries that cut production and to new rules limiting the sulfur in gasoline.


In Asia, product prices have remained relatively stable. Figure 1 shows the prices for gasoline, low-sulfur distillate fuel oil, and low-sulfur marine fuel in Singapore. These prices were pushed down in late 2019 and further threatened by a potential surge in Chinese exports.


The exports have not materialized. Chinese refiners cut product output as the economic situation there worsened rather than dump surplus fuel onto the world market. As a result, serious contango could develop in crude markets, with Brent cash prices holding around $60 per barrel.


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