The sharp fall in crude oil drives the decline in fuel oil, and the cracking spread is highly likely to be adjusted downward
2020 4 On March 12, the OPEC+ crude oil production reduction agreement was finally reached. All parties agreed to reduce total crude oil production by 9.7 million barrels/day from May 1 to June 30, 2020; from July 1 to December 31, production would be reduced by 7.7 million barrels/day. days; production will be reduced by 5.8 million barrels per day from January 1 to April 30, 2021. However, the production reduction was only implemented on May 1, and the amount of production reduction was still difficult to match the loss of crude oil demand, resulting in a situation where oil prices continued to fall before the production reduction. The main fuel oil futures contract followed suit. The 2005 contract fell due to the concentrated registration of warehouse receipts last week. There was a sharp decline under pressure. However, against the backdrop of a marginal improvement in the impact of the epidemic and dual pressures from supply and demand, the situation of crude oil is expected to improve. The unprecedented scale of production cuts may support oil prices. When crude oil truly stabilizes and rebounds, the 380 fuel oil crack spread is expected to fall.
From a historical perspective, the 380 fuel oil cracking spread is negatively correlated with the absolute price trend of crude oil . Once crude oil prices stabilize and rebound, it is likely to drive the 380 fuel oil crack spread to weaken. In the second half of 2019, due to IMO driving, the high sulfur 380 fuel oil crack spread fell off a cliff to a historical low of -$28/barrel, and then soared until 2020. On April 1, it was -0.5 US dollars per barrel. As crude oil plummeted and gradually stabilized, the crack spread of light oil products began to rebound, and the crack spread of 380 fuel oil may begin to adjust downward.
There is a certain leading-lag relationship between freight rates and cracking spreads. Freight rates are roughly 30 days ahead of cracking spreads, and tanker freight rates are roughly negatively correlated with monthly crude oil spreads. Without the impact of the epidemic, the global shipping capacity market will tighten in 2020, and it is highly likely that the shipping market will be boosted. However, the plunge in crude oil has led to a deepening of the premium structure of crude oil in the far month, and the surge in demand for floating storage has driven up freight rates. The crude oil production reduction agreement comes into effect on May 1. After the epidemic situation improves at the margin, the deeply premium crude oil structure is expected to improve, the demand for oil storage decreases, and freight rates are expected to return to normal levels. Then the support of freight rates on the near-end crack spread is expected to weaken.
Multiple factors drive the high price difference between 380 internal and external prices
The underlying price of fuel oil futures is the bonded 380 CIF price, with import dependence exceeding 90%. The price difference between internal and external prices helps anchor the Fu range. The factors that affect the price difference between internal and external markets include the supply and demand situation of 380 fuel oil in the Asia-Pacific region, the discount of 380 fuel oil in Singapore, and freight. The freight affects the east-west price difference and thus affects the West-Asia-Pacific high-sulfur fuel oil.
The monthly differences between the two places are approaching, confirming that the fundamentals of supply and demand in the two places have not changed much. The recent surge in freight rates has caused a sharp increase in the price difference between internal and external prices. However, the price difference between the Singapore CIF price and the fuel oil futures 2009 contract after taking into account freight is still low. Therefore, although the main fuel oil futures contract has fallen sharply, the price difference between internal and external prices has remained relatively stable. , the decline in crude oil dominated this wave of decline in fuel oil futures.
Therefore, the factor supporting the high price difference between internal and external prices is mainly freight. On March 1, the freight rate for 80,000-ton oil tankers from Singapore to Ningbo was US$8/ton. On April 24, the freight rate was US$43.5/ton, an increase of 440%. Judging from the fundamental situation of tighter supply of 380 fuel oil, the epidemic has caused a sharp decline in global oil demand, global refinery maintenance has reached a record high, and the supply of finished products in various places has dropped significantly. For 380 fuel oil, the supply decline has exceeded expectations. In addition, starting from May 1, OPEC+ countries began to implement crude oil production cuts. The reduction of medium and heavy crude oil from Saudi Arabia and Russia will accelerate the process of lightening global raw materials. A further decline in fuel oil production is expected. The recent surge in freight rates has led to arbitrage space between the East and the West. Being eroded, Asia-Pacific 380 fuel oil supply is likely to tighten in the future. After the reality of a cliff-like decline in sales of high-sulfur 380 fuel oil in the first quarter of 2020 (this expectation has been fully reflected in 2019), sales of 380 fuel oil in Singapore have stabilized. This different change in supply and demand will inevitably trigger different expectations.
It is worth noting that the current market recognition of fuel oil futures is relatively high, and the downward increase in positions still represents a large gap between long and short positions. Compared with crude oil futures, the unit of 10 tons/lot of fuel oil futures is more attractive to industrial customers, institutions, and individual investors. However, the high correlation with crude oil is also one of the reasons why fuel oil futures positions and transactions have reached record highs.
The long and short differences will be large in the future, waiting for further confirmation
The recent downward trend in fuel oil futures reflects the huge differences between long and short positions. In 2020, IMO caused a sharp decline in demand for high-sulfur 380 fuel oil. Singapore’s sales of high-sulfur 380 fuel oil in March were 653,000 tons, year-on-year.�� fell by 78%, and most of the high-sulfur share was replaced by low-sulfur. However, as the 380 fuel oil cracking spread bottomed out at the end of 2019, supply decline expectations and refinery processing needs became new drivers of high-sulfur 380 fuel oil.
For short positions in fuel oil futures, excessive positions are a negative factor. The existing warehouse receipts exceed 400,000 tons, and with the addition of new warehouse receipt registrations in 2009, the final warehouse receipt volume may be between 1 million and 2 million tons. The current approved fuel oil storage capacity is 1.217 million tons. If the delivery warehouse is not expanded in the future, the validity period of the warehouse receipt will not be Shortening (the maximum validity period of the warehouse receipt is 2 years), if such a high position (more than 800,000 lots, 8 million tons) continues to exist, there will be a certain pressure on the short sellers. However, the position is likely to decline as delivery approaches.
For long fuel oil futures, the digestion of warehouse receipts is a negative factor. Calculated based on the 78% year-on-year drop in Singapore’s demand for high-sulfur 380 fuel oil, Zhoushan’s fuel oil sales in 2019 were 4 million tons (based on the assumption of most high-sulfur 380 fuel oil), and Zhoushan’s demand for high-sulfur 380 fuel oil in 2020 is 880,000 tons. Then, if it takes more than a year to digest 1 million tons of warehouse receipts based solely on ships, bulls may have to find other outlets for demand for 380 fuel oil.
For short sellers, crude oil storage capacity has been increasing recently, and storage fees have increased from 0.2 yuan/ton/day to 0.4 yuan/ton/day. There is a probability of seeing fuel oil delivery in the future. approval from the warehouse (but considering that the high-low sulfur conversion is over and low-sulfur fuel oil is the mainstream oil, there is little need for 380 fuel oil to occupy too much delivery storage capacity). On the one hand, storage fees may increase; on the other hand, the validity period of warehouse receipts may be shortened (the current validity period of fuel oil warehouse receipts is too long, which is conducive to bulls occupying storage capacity and using the fuel oil futures structure to earn monthly differences). By increasing storage fees, Shortening the validity period of warehouse receipts and changing the market structure can reduce the occupation of inventory resources by bulls and better serve physical enterprises. However, the domestic monthly difference structure is basically the same as that in Singapore, and there is no structural distortion caused by funds.
For bulls, the validity period of the warehouse receipt will not be shortened, and the storage fees will not be increased. The bulls can continue to buy near and sell far during the validity period, without considering the final digestion of the warehouse receipt. question. Crude oil has stabilized recently. In the fourth quarter of 2019, the United States and India began to purchase high-sulfur fuel oil as refinery feedstock, and some warehouse receipts for the 2001 contract were imported by the refinery through customs cancellation declarations and used as processing raw materials for a refinery in Zhejiang. However, In the context of low oil prices, the processing economics of high-sulfur 380 fuel oil are poor. If crude oil prices surge in the future, the main refineries will supply low-sulfur fuel oil, and the residual oil discharged from the market will drop sharply. There will be less residual oil resources in the market that can be used for deep processing. If it is less, it cannot be ruled out that the refinery’s feed demand for 380 fuel oil will increase significantly. </p
