SPR release impact on Refining and storage economics

FAISAL FAEQ

@FAEQ

WTI and Brent crude prices have both comfortably settled above the

$90 mark after two months from the announced coordinated SPR releases that were thought to have a downturn impact on oil and gasoline prices, we see an adverse upward impact on oil prices from one side, and an adverse impact on the refining economics and the storage economics prospects.

Storage economics:

The year 2021 has ended with the backwardation forward curve holding across the market structure throughout the year, which showed a tight market that most probably to be continued during most of 2022.

Taking the higher crude oil prices and the backwardation futures forward curves in the market structure into account, consuming nations should ideally wait for the market dynamics to change before considering building up its strategic reserves and compensate the SPR releases in order to maximize storage economics.

This mean that they might wait for long time as the upward trend seems to be the new norm for oil prices movement.

A backwardation in the crude market structure represents lower prices for forward month futures contracts than the current months spot prices, which gives less incentives for storage builds up, hence providing little incentive to store oil for later use.

It was an unfortunate move for large oil consumers, the SPR releases timing in the third quarter 2021 wasn’t a wise time in terms of its economic prospects as those states didn’t consider prices levels time of the release and the time those barrels were stored at much lower prices then when compensated them back.

Hence, they should have waited for oil prices to turn lower or the market structure to flip to contango. Storage economics didn’t seem to work fine as large oil consumers have released expensive SPR barrels.

Refining economics:

As for the refining economics, most of Asian refiners didn’t show great interest and have emphasized that the governments’ SPR barrels should be utilized during emergencies that might cause drastic supply disruptions. This is mainly because some major Asian refiners hold more oil in their storages than their states, which brings the attention that SPR releases didn’t precisely meet their crude diet as they have sophisticated and specific feedstock configuration, taking into account that the specification of crude diet frequently changes as per the preferred refining economics.

Upon the start of year 2022, refining economics continued to trend upwards, posting solid gains while spring seasonal declines in refinery processing rates that might be attributable to the peak maintenance season might weigh down on petroleum refined products inventories and continue to keep product balances tight.

In Asia, refining margins showed the strongest gains relative to the other regions, supported by rising gasoil margins as the recovery in the global economy stimulated product demand.

Diesel markets, in particular winter high demand season, benefited also from strong requirements from the power generators sector and gasoil was sought after as a more viable fuel alternative, given the record-high natural gas and coal prices.

Rising industrial consumption, as economies reopen from COVID-19 restrictions, provided stimulus to product markets, while key consuming nations posted a boost in diesel sales back to pre-COVID levels amid strong industrial and manufacturing activities following the relaxation of pandemic related-restrictions in some nations, proved supportive.

At the same time, the earlier cut in gasoil exports from China to minimize the nationwide energy crises due to the coal and natural gas shortage end of 2021, has incentivized some major Asian consumers to alleviate the shortfall in supplies, which contributed further to the strengthening diesel prices.

In a view of the above, both storage economics and refining economics didn’t work well with the timing of SPR releases specially when oil prices and gasoline prices are still trending higher.