Market Insights: Navigating Recent Trends in Energy and Petrochemicals – Week of 25 January 2024
Oil Markets Insights
The oil market has witnessed a dynamic interplay of factors in recent weeks, shaping sentiments and driving prices. Key among these has been the unexpected disruption in the US oil supply due to severe weather conditions. Arctic temperatures led to power outages and facility breakdowns, causing a significant drop in production. However, while a swift recovery is expected, the capital discipline and subdued demand growth make a repeat of last year’s rapid escalation in US oil production unlikely.
China is intensifying stimulus efforts to instill market confidence, injecting liquidity into the banking system to foster economic growth. In particular for oil consumption, China’s refinery runs are set to be boosted, fueled by a fresh crude import quota of 179 million tonnes. Notably, China has departed from its previous practice of releasing import quotas in batches, opting instead for a full-year allocation, granting market players greater flexibility.
Geopolitical tensions have added a layer of complexity to the global energy landscape. Conflict-induced supply and logistics disruptions persisted, with Ukraine drone attacks targeting multiple Russian energy infrastructures, including a fuel export terminal on the Baltic Sea and a local oil refinery.
In the Middle East, Houthi attacks continued to disrupt navigation in the Red Sea and the Suez Canal with the list of companies bypassing the Bab-el-Mandeb Strait expanding.
Despite these challenges, bullish sentiments have prevailed in the oil market. Improved demand expectations, supply disruptions from weather-related events, and geopolitical tensions have contributed to a positive outlook. As of January 25, Brent futures settled at $82.43 per barrel, reflecting a 4.2% increase week-over-week.
Oil forecasts have been maintained, but upside risks are emerging. Renewed optimism in global oil demand and an increasing risk premium due to geopolitical unrest could drive prices higher.
Gas Markets Overview
Shifting focus to the gas market, indicators in the northern hemisphere winter’s final phase remain cautious. European TTF futures have dipped slightly, and Asian spot prices have seen a decline. However, the security situation in the Red Sea poses a significant geopolitical risk, as evidenced by Qatar Energy’s suspension of shipments through the region.
In the US, a surge in heating demand led to a substantial reduction in gas stocks, but a quick recovery in production following the weather-related event has contributed to a 19% drop in US Henry Hub futures, settling at $2.189 per MMBtu on January 25.
Propane Market Update
As of January 25, propane prices at Mont Belvieu experienced a decrease, closing at 88.13 cents per gallon, marking a 4.3% drop from the previous week. This decline contrasts with the upward trend in crude oil prices, with WTI closing at 77.36 dollars per barrel, up from 74.08 dollars per barrel last week.
The recent volatility in propane prices, characterized by a sudden rise followed by a drop, can be attributed to the Arctic Blast that hit North America last week.
Contributing factors include weaker exports to China and Japan, a significant 57% year-to-date decrease in the benchmark freight rate from Houston to Chiba, healthy inventory levels at Mont Belvieu, and growing North American production.
While the bottleneck at the Panama Canal, limiting daily vessel traffic to 18 with a queue of 56 vessels and a 23-day wait for returning vessels from Asia, adds to the market noise, the reality is that the market’s current pace is mostly influenced by economic factors in Asia.
Asian Naphtha Markets Update
In the Asian naphtha market, prices increased, accompanied by a modest improvement in crack spreads. Ongoing challenges like limited vessel capacity at the Panama Canal and geopolitical disruptions in the Red Sea have impacted the naphtha market, but their overall impact remains limited.
Naphtha crack spreads saw a slight improvement, closing at -8.81 dollars per barrel this week.
This modest tightening of crack spreads, despite the increase in naphtha prices, is consistent with trends observed over the past few weeks and is largely attributed to the continued reduction in refinery runs in China.
Additionally, the naphtha market is dealing with challenges such as limited vessel capacity at the Panama Canal and ongoing geopolitical disruptions in the Red Sea. Nevertheless, the overall impact of these factors on the naphtha market is considered to be limited so far.
Vice President, Energy and Feedstocks | NGL & Naphtha
Associate Director, Energy Insights