Listen: 2023: The changing map of oil trade

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Joel Hanley:

Hello and welcome to the Platts Oil Markets podcast from S&P Global Commodity Insights. I'm Joel Hanley. In this episode, we're taking our annual look back over the last year in oil markets. While 2023 can't match 2022 for drama, can it match it for intrigue?

It is no understatement to say that as years go, 2023 had a tough act to follow. In 2022, the post-COVID world was shaken by Russia's invasion of Ukraine, forging strong alliances and creating new trading routes, like the world map was some kind of board game you're forced to play at Christmas time. These stakes, however, are of course much higher and 2023 has been a year of adapting to yet another new normal. Western anger and sanctions directed at Russia have created opportunity for many whose sensibilities aren't quite so offended by Russia's action. And this has led to trade flows adapting and assessments too. With me as ever at this time of year is my good friend and colleague, Richard Swann. Now between us, Richard and I are responsible for the market coverage and assessment of oil and refined products for S&P Global Commodity Insights. I lead the fuel and crude oil side and Richard looks after the clean refined products from Houston. Richard, welcome along. Can it really be a year since we last did this?

Richard Swann:

Hi Joel. Yeah, thank you. It really is. I mean I think you're right in your intro to say it's a tough act to follow 2022, but yeah, we've got a awful lot to talk about here when we look back at some of the way the markets have adapted this year. So I think we should get stuck in.

Joel Hanley:

Well absolutely. I mean I mentioned Russia in the intro. Russia was of course the major story of 2022 or the Ukraine was the major story of 2022. We've seen that the sanctions of behavior from the Western powers really taking shape in 2023, haven't we? Those trade flows being redirected as I mentioned.

Richard Swann:

Yeah, we really have. It's funny, you start with an analysis of trade flows and we're not going to get into the individual tanker tracking today on this podcast, but it really matters because what's happening is you've got these two-tier markets now developed. Russian oil, crude and refined products, is still flowing, but it's not trading in the benchmark markets around the world. It's trading in a different environment, if you will. Let's look at diesel first, maybe might be the most obvious starting point. Russia, a huge supplier of diesel traditionally to Europe, right on its doorstep. Essentially none of it's going to Europe now, it's found other homes, and maybe the most interesting trend we've seen this year in diesel has been the way Brazil in particular has emerged as the key buyer of Russian diesel. Not the biggest buyer every month, Turkey still surpasses it quite often, but out of nowhere, never used to take Russian diesel at all.

It's diesel-short, Brazil, it always used to buy from the US and suddenly it's being offered cheaper diesel, same spec, different price. So it's interesting. So the Russian sellers of course are just selling at a discount there if you like. They're saying, well what can the US supply? Alright, we'll offer you a discount of a few cents per gallon or a few dollars per barrel. We started an assessment earlier this year for this new flow of Russian diesel but also all-origin diesel really into South Brazil. And it's interesting because you can use it to compare the price difference relative to the same flow from the US Gulf Coast. We published the spread between the two and actually the new all-origins assessment is currently about $4.40 per barrel cheaper than the same diesel would cost you to buy from the US. So quite a decent saving, not huge, you are not talking $20, $30 a barrel, it's $4 a barrel, but it's significant.

It has been as much as $10 sometimes, but that flow has really taken shape and if you're an importer of diesel into Brazil, of course you're getting cheaper product. And there's nothing, just to reiterate, there is nothing illegal here. No one is breaking sanctions in that flow. The sanctions apply to G7 services and if you want to use G7 services for that flow, you have to use stick to the price cap. But no one is breaking sanctions in that flow per se. I want to actually touch on, sorry for going on so long on this first answer, I want to talk about naphtha as well. Another huge export out of Russia, naphtha, again, used to mostly go to Europe, not anymore because of sanctions. Now it's not going to Brazil or at least, not at any large volumes. Naphtha generally is going east, the center of naphtha demand if you like, is going to be the petrochemical industry in Asia.

So fairly naturally it would look to go east, but it's a complicated trade flow. This shows you really how the market has adapted. So you're not seeing a huge amount of Russian cargoes loading in the Baltics, let's say, and sailing all the way around direct to South Korea or Japan, not at all because they actually have sanctions against Russian product anyway. But South Korea, Japan, you're not seeing these nonstop voyages on the whole. What you are seeing is a lot of trans shipment, you're seeing naphtha cargoes loading out of the Black Sea as well as the Baltics, maybe stopping in Tunisia. Then a new voyage will take place or maybe they're going to the United Arab Emirates or Singapore or two of those. And then you're seeing the onward sales. So I mentioned South Korea earlier, we've seen you can very easily trace a correlation between an increase in flows of Russian naphtha to Singapore and then a big increase in exports from Singapore to South Korea.

And that's interesting. These chains are getting quite hard to trace and it's getting quite opaque. As with the diesel into Brazil, we actually have an assessment that to a degree you can use to see the discount if you like for Russian naphtha potentially flowing into Asia. It's not as specific as saying it needs Russian naphtha. It's essentially all-origin naphtha coming out of commercial tanks delivered then into South Korea. Intriguingly at the moment that discount is zero. It's at parity with normal benchmark naphtha and obviously this discount can reflect market structure and things as well a little bit. But it's interesting, it's never been that big. Even when we were in the first days of the assessment, there's maybe $5 a ton, so a much smaller discount for this naphtha, but it's finding a home. It's interesting how the flow has adapted. Is that similar at all to how the crude flows have adjusted, Joel?

Joel Hanley:

It is to an extent, yes. In as much as the shipping is certainly harder to track. I mean not least because the dark fleet has many tricks. There are transponders that get turned on and off depending on where they are. But obviously the major winners, if you will, of all of this has been the likes of China and India who've been able to buy Russian Urals crude oil round about 10 million barrels a day previously. Now a bit off that of course. They've been able to buy it essentially on the cheap and they made hay while the sun shone. Now in fact we're seeing a bit of a dropoff in Russian volume going to India and the like. But there was originally a $30, $35, maybe a $40 a barrel discount to what we'd previously seen for the value of Russian Urals. But that's crept up as that flow became regular.

And now as the volume of Russian crude oil has dropped a bit, we do actually see that flow being a bit more expensive and also slightly less. And indeed you mentioned new assessments. We've started assessing Russian crude oil on a Dubai basis because of course the oil doesn't look too dissimilar to the Middle Eastern sour and as much as medium heavy, medium sour. And also that's the general direction of travel. So as I mentioned on previous podcasts at some point this year, you go to Dubai these days and most of the menus are in Russian. That's where a lot of their traders moved and indeed the trade has as well.

Richard Swann:

It's interesting how much impact sanctions have on market flows here. Obviously in the case of Russia. Sanctions though have flared up again towards the back end of this year with regards to Venezuela.

Joel Hanley:

Yes, just when you thought that Venezuela had maybe turned a corner with the US and various others, there's a bit of say, rattling going on in the southern Caribbean. Venezuela and Maduro, they have their eyes set on certain parts of Guyana. There was a source of referendum that looks like that the Esquibo region might be under some threat from Venezuela. It might just be talk at this moment, but Venezuela has been allowed to have its sanctions loosened some more by the US and this would certainly put it straight back into onto the naughty step, wouldn't it? But Guyana is a really fascinating area and one of the really big stories of this year. Our colleague here at S&P Global, Dan Yergin, he recently called Guyana the fastest offshore oil development in the history of the world. And who are we to challenge him on that opinion?

We here at Platts, we've launched three assessments of Liza, Unity Gold and just recently Payara as well. And we've seen bids and offers, well offers certainly, in these markets publicly and transparently proving price of this huge explosion of crude oil from Guyana. There's about 11 billion barrels of oil in reserve there. And it's big players, this is a really serious business. There's Exxon, there's CNOOC from China, there's the term contracts from the national oil company who've been largely awarded to BB Energy. And don't tell me that Chevron's $53 billion acquisition of Hess wasn't in part motivated by Hess's ownership of some offshore interest in the blocks there. So it's a really interesting story. Due in part because of Russia, it's a medium heavy lowish sulfur barrel. It looks a bit like Angolan, which is very much the slate that the Chinese would like and perhaps it's a replacement for Russian Urals.

So it's a really big market, a very exciting market and one that we are monitoring on a daily basis because it's one of those rare boom areas of crude oil right now. Listening back to last year's podcast, I try not to listen to the sound of my voice as often as you might think, Richard, but I did hear us talking about this time last year, diesel being sky high, and you were wondering how that was going to play out over 2023. I don't think we got a prediction out of you, but tell me what you've seen there. Because jet has been since the pandemic jet has always interesting, but jet has been particularly interesting, but diesel was pretty strong this time last year. What are you seeing there? Has 2023 played out like you expected?

Richard Swann:

Yeah, a little bit. I think it has. So jet and diesel, the middle distillate twins if you like, sometimes they seem to be fighting each other for relevance. One will usurpt the other in pricing, but they kind of have to move together a little bit. They get produced in tandem if you like, by the refineries, and they've been strong and they're still strong now measured as crack spreads against crude. We're not at the point we were let's say in the immediate aftermath of the Russian invasion of Ukraine or even the run-up to last winter actually, where some of these crack spreads got to just unheard of levels at $40, even $50 per barrel for a margin that doesn't really make sense over the long run, but the cracks are high still. as we go into, I mean I guess we're entering at least the meaty part now of the northern hemisphere winter and so far it's not looking as alarming in terms of the crack spread outlook as it did last year.

But diesel crack spreads in all three regions essentially, so look at the US, look at Europe, look at Asia measure cracks against Brent crude to keep it consistent, they're all in that sort of mid-20s dollar per barrel range yet well down from where we were last year, but well above seasonal norms. And jet's actually pretty similar as well, jet slightly over in Europe, slightly under in the US or over on the Gulf Coast actually right now. They're similar kind of levels. So these are historically very strong crack spreads, suggesting strength in the market, but it's hard to read. If I look at the trends over the last couple of weeks, actually starting in mid-November towards late November and right up to this point in mid-December, there's really pronounced weakness right now in the distillate markets, in the physical markets in the US in particular. The Gulf Coast is a huge refining sort of center of the US, exports ton of product, talked about they've lost their market in Brazil to the Russians, the refiners.

They're also struggling to get product out through the Panama Canal because of the delays, which we've talked about on this podcast. And as a result, the product seems to be piling up. It feels long right now. Physical diesel on the Gulf Coast is more than 40 cents below the NYMEX futures. This is a record level and it's in real trouble whether there's some element of the end of year sell-off for tax reasons, that does come in December quite often in the US in Texas in particular. The taxes do penalize you for holding inventory at year end. So that can trigger a selloff. So I dunno, there's a bit of push versus pull I suppose is what I'm saying here. You've got physical weakness and oversupply it looks like in the US, but the crack spreads actually are still strong.

Joel Hanley:

So that's the middle of the barrel taken care of. How about the lighter ends?

Richard Swann:

Well, gasoline had actually a relatively strong summer as you might expect in the northern hemisphere. Got to sort of parity or even over the middle distillate complex. Naphtha though, as part of light ends has had a year to forget, really low prices if you're a producer, terrible crack spreads really negative versus crude the whole year. But actually terrible margins for the petchem producers as well. So it's not like they were benefiting from cheap feedstock. Actually ending the year on a bit more of a positive note, the crack spreads for naphtha, if I look at Europe and Asia, they're still in negative territory, but they're in sort of mid single digits, let's say, getting towards that versus Brent crude, whereas actually all summerlong we were more like minus $15, so still very weak and actually the petrochemical demand is not really there. Gasoline doesn't feel super strong though.

And in fact right now we've had very high octane all year. So the premium you would pay for the high octane gasoline grades over the regular grades has been pretty wide for a long time, but has really started to come in of late towards the end of the year. That has a strangely converse effect of helping to lift naphtha. Naphtha is the cheap blend component, sort of moves in the opposite direction to the octane value sometimes. So starting to come together a little bit at the end of the year, but not the same picture of strength as we see in middle distillates, I would say. So if I said naphtha has had a pretty awful year all round, maybe Joel, maybe give us something a bit more uplifting. What's been happening on the crude side?

Joel Hanley:

Well, it's been a very interesting year on crude, particularly in benchmarks. The Dubai benchmark in the Middle East for medium sour crude and heavier sour crude has been going great guns. Not least I suppose with volumes inflated from all that Russian flow as I mentioned, and pricing perhaps looking a bit more Middle Eastern for those barrels. And we saw near record volumes and near record convergences and deliveries in the Platts MOC, which is very interesting. And also that's a benchmark that's gearing up for its 40th anniversary and that's almost as long as you've been at Platts, Rich. So it's going to be in January, it's going to be its birthday and we'll probably roll out some celebratory efforts for that throughout the next year. And I suppose the even bigger one, of course is Dated Brent and that's celebrated the arrival of WTI Midland into its complex in the summertime.

And that was, I mean that's a culmination of a great deal of work as you know, and I've been working on past Dated Brent the last 20 years or so, and I feel this really was a culmination of something quite special that we've been working on for some time. And I think the involvement of US barrels coming into what is a European based benchmark, but very much a global crude oil benchmark, has been a real success. And I mean you might say, well, we might say that, we're Platts, but genuinely we've seen we've opened up another, at least one and a half million barrels a day, I suppose US exports and US production continues to climb. And it's given buyers and sellers another opportunity, another grade to help define the value of Dated Brent. And let's not forget, this was a grade that was already a mainstay of refining in Europe and has been pretty much since 2016, I guess just after the so-called export ban was lifted.

And one thing that comes up quite a lot is how often does WTI Midland help define the value? How often is competitive, how often is it the lowest value to those grades? And the answer is quite a lot of the time there's a lot of it, it was coming into a European refining zone that didn't need much more light sweet crude right now. But I think to try and extract that value from Dated Brent and see where it would be without Midland is a bit of a fool's errand frankly, because of course these grades behave perhaps somewhat differently when they're in a benchmark. So now we have a lot more barrels helping define price, which of course we're very pleased with. And the market is too. I mean we've had a lot of support from people and there's a great deal of collateral that I would advise our listeners to go and read, listen to or otherwise digest.

Now I'll tell you something else about the crude oil markets is the year that OPEC has had. I think that's been a particular interest. I remember you and I going to Vienna all those years ago, repeatedly chasing around ministers and filing stories on the hop and it was all good fun. Nowadays it's a bit more sedate even though there are more people in the OPEC building, it has for a while seemed a bit more sedate, at least until this year I think they might be struggling with a bit of a credibility gap having made themselves so relevant and that inspired move to bring in the other countries to make the OPEC_ club, if you will. So with that in mind, Richard, you as I know you're on the clean refined side, but very much an OPEC watcher over the years. What do you make of their recent year or their recent performance?

Richard Swann:

Golly. Well, I think we all have to watch it. Even if you're in the products markets, the crude balance sets the tone, sets the price really underneath everything. It's really hard, the spot they're in at the moment, I feel. If I look at the core of OPEC+, you still look at Saudi Arabia plus a small number of key allies and it's a very cyclical thing. This happens over history. This happens repeatedly with OPEC or now OPEC+, price versus volume. You can't have both, which one do you want? And they look like they're trying to support price through cuts. But as you said, when you talk about Brent, you talked about US exports continuing to rise. So what's OPEC trying to do here? Are you just going to keep cutting volume to support the price that just incentivize producers from outside of your agreement to just take that market share? And for now they are going down that road. But every single time that's happened in the past, at some point that breaks.

Joel Hanley:

It does indeed. And also I think I mentioned the credibility gap. There was an OPEC meeting back end of November and there was an expectation they would cut, but then the cut had a certain voluntary sort of whiff about it, which led to a bit of a lack of confidence I would say in the organization and indeed has led since then or certainly contributed to at least $5 off the head level oil price for barrel.

Richard Swann:

Yeah, there are some tensions there aren't there? I felt that they sounded quite defensive explaining that agreement. It didn't quite carry the credibility into the market, which is difficult. I suppose we're starting to look ahead now, aren't we? To next year? I'm not going to ask you what OPEC's going to do because that's a really tough prediction.

Joel Hanley:

Thank you.

Richard Swann:

Clearly it's going to sort of set the tone for the first quarter of the year for sure. There's some tough decisions to come there I think.

Joel Hanley:

Well there's also the management of what's going on in the Middle East at the moment. Of course, I mean there was October the 7th and the invasion by Hamas into parts of Israel and of course that has led to heightened tensions, the likes of which we haven't seen in so many years. And while neither are exactly OPEC members or indeed huge producers, it is that Middle Eastern tinderbox that just could conflagrate. And I suppose the whole markets have to manage that. It's not just OPEC of course, but do you see that being potentially a big issue going into 2024?

Richard Swann:

It's something everyone will always watch. I mean I think if you look at the threats to global commodity markets that could come out of the Middle East, it kind of starts with the political, but it can quickly lead into physical market issues potentially, which is why people will always keep a very close eye on it. One thing worth might of course, is we tend to sometimes look at the Middle East and especially myself living here in Houston, you tend to think of what's the US doing? How is US policy influencing in this case Israel or others in the region? Let's not forget, things have changed a lot in the time you and I have been at Platts, actually, Joel. Who's the big buyer of Middle East energy now? It's China, more than the US surely. So who's got the most skin in the game here the most potentially to lose for any disruption will be China. So I would suggest, well you still need to watch obviously the sort of conventional diplomacy from the west, let's say, need to watch what Asia thinks of this conflict as well more closely.

Joel Hanley:

China more broadly as well. You can't talk about global crude demand without looking at China. And this is a country that, I'm not saying it's in trouble because its GDP growth of 3.5% in Q3 That would be the envy of just about any European country, particularly here in the UK post-Brexit. But when that's compared with GDP growth of over 6% for the US, this is a country that all the China watchers are saying, well there is a gradually a knock-on effect. And of course that will mean potentially more OPEC cuts when China just stops buying. I mean they won't stop buying totally, of course. But it certainly has slowed and we've seen quite a bit of a paradigm shift when it comes to China, I would say. I think another one, if we're looking in the crystal ball for 2024, the continued effort for energy transition, I think it's been here in the UK, we've seen protest after protest and arrest after arrest of people gluing themselves to this and that and walking slowly in the roads and getting beaten up by taxi drivers who are frustrated by them. But it's all publicity for the energy transition. We're seeing more and more of it. And just recently there was the big headline about the trans-Atlantic flights that was fully powered by sustainable aviation fuel. Obviously SAF has being used quite a lot over the last few years and it grabbed the headlines, but it's no bad thing for the energy transition is it? I mean it's all good publicity, I suppose.

Richard Swann:

Yeah, some of the things we assess are getting a lot more traction and questions in coming to us, whether that's SAF, we assess biopropane, bionaphtha now. These markets are the real face of the energy transition where conventional oil markets are going to move towards for sure. And we're seeing a lot more supply deals, a lot more actual pricing going on for all of these products. Also carbon intensity, I don't think for refined products it's necessarily at the stage where it's actively being priced into the products yet. But the amount of interest in this has really grown this year. We're getting some really detailed questions from people about the numbers we publish ourselves around carbon intensity of some of the commodities, what's the underlying methodology, how they work, people are starting to try to account for it. So clearly a trend to continue next year.

A brief shout-out crystal ball wise, there's crystal ball, but just a reminder, really refining balances are changing as well. So I know we've said this before, but that Dangote refinery in Nigeria, it looks like it really is starting this time, they've taken delivery of some crude and there's more coming. They've been clear about the crude they're going to feed in, at some point that means the products are going to come out. So look out for the impact of that across the barrel really. But certainly diesel, jet fuel, and potentially the gasoline flows into Nigeria, things like that. Atlantic basin balances will be altered by just that one very big refinery.

Joel Hanley:

Absolutely right. And I understand that the gasoline stuff might take a little bit of extra time that's going to be coming out later in 2024, but jet will be the first major thing they're taking. As you say, they've seem to have decided some of their slates. So they've got a middle distillate-rich grade in Agbami, hence jet will be the first. But I think you seem to think that that's often the first thing.

Richard Swann:

Yeah, jet's a straight run product, right? I'm not a refining engineer, but yeah, typically it is when you start up, you don't need to start up some of the downstream units that you're going to need to sort hydrotreat the ULSD and things like this or get the fluid catalytic cracking goingt. Jet will typically be one of the first, and when you think about balances, it'll be more visible because we'd expect that jet to be exported.

Joel Hanley:

Yeah, absolutely. And also the listener might fancy going back a couple of podcasts when we discussed all this actually on the gasoline front, about heightened legislation around gasoline specifications coming out of Northwest Europe, which very often a slightly lesser specifications has found its way into Africa and particularly into Nigeria. But all that has somewhat changed recently or is indeed set to change. So I do invite you to go back a list of that podcast again. So Richard, I'm not going to ask you for a price that you think Dated Brent will be this time next year with something that we like to do at events and we do a big a vote and the audience could all choose what price they decide. I remember at a recent event in Singapore was APPEC. In fact, I think most people thought that the price would be between 70 and 80, which is where we are as we record this, but goodness only knows where we're going over 2024.

Richard Swann:

Yeah, predicting flat price is tough to be honest. And if I'd fancied I could ever do it, I probably wouldn't be working here. But in terms of relative strength, I do think the distillate strength, if it is going to need a cold winter to be prolonged if you don't get a cold winter in the Northern hemisphere, like how long can you really maintain these sky-high middle distillate cracks? It's been a long time now. Gasoline at some point though it's not going to be about seasonal, it's going to be about the demand story. Our own analytics department does expect gasoline demand is basically at or has peaked in the US, the world's biggest consumer. This demand side erosion is going to start to hit at some point.

Joel Hanley:

And speaking of balances, I think one of the major stories over the next year as it has been this year, and something I probably should already have mentioned if I'm talking about crude oil, is the Brent-Dubai spread, that sweet-sour spread where as I mentioned earlier, the US has been producing huge amounts of generally lighter, sweet crude into a region that doesn't particularly need as much of it as they would like. And also meanwhile the sanctions and other limits and indeed heightened demand in some parts of the east have led to an inversion, if you will, whether the sour crude in Asia is worth more than the sweeter crude in the Western area. So that will be interesting to see if that continues. I mean it is inverted as we speak now, but it will rather depend on the requirement of China to see how much of either crude they need. That will help define that balance in the coming year. Great. Thank you very much Richard. It was great to get your views on 2023. I look forward to working with you in 2024 as well, of course. And thank you listener for your continued interest and support for this and other S&P Global podcasts throughout 2023. We are looking forward to having you join us again in 2024. This episode of the Platts Oil Markets podcast was produced by Jennifer Pedrick in Houston.