The staff of FUELSNews presents FUELSNews 360° Q1 2017
Quarterly Report: Market News & Information.
FUELSNews 360°, published four times a year by Mansfield Energy Corp., analyzes and summarizes the prior quarter’s activity in the oil, natural gas, renewables and refined products industries. The purpose of this report is to provide our customers industry market data and trends both domestically and globally and deliver some insight into upcoming challenges facing the energy supply chain.
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The first quarter of 2017 began with a rare bit of calm in fuel markets. Crude prices remained stable through January and February in the low-$50s range before dropping in early March to $47, only to recover by the end of the quarter. Looking towards the remainder of the year, news from OPEC will likely continue driving oil prices.
Markets took a “wait-and-see” approach to OPEC production cuts and a new U.S. political administration. High compliance from OPEC and non-OPEC members put upward pressure on prices, while a March interest rate hike and oil-friendly political appointments and policies in the U.S. applied downward price pressure. Market-driving news was limited throughout the quarter, leading markets to turn their attention to macro issues.
While international events and politics drove NYMEX prices, regional fluctuations in refined product prices were moderated by high inventories. Diesel prices in the Midwest and Great Lakes were temporarily propped up by unplanned refinery outages, but other regions have seen only small changes in basis levels during Q1.
As refining capacity in the Great Lakes region has increased, suppliers have been forced to find a home for excess fuels in Northeastern states, keeping fuel prices in the Northeast unusually low for the winter. Mixed with low demand from a warm winter and imports from Europe, the Northeast has become a dumping ground for refined products, freeing up supply throughout the East Cost to keep prices subdued.
Geopolitical factors are likely to play a significant role in fuel prices in Q2. With a new administration in the White House and many new diplomats, including former ExxonMobil CEO Rex Tillerson serving as Secretary of State, markets and foreign nations will be watching the U.S. response to major events. An uptick in international instability, combined with the uncertainty of a new administration, could increase market volatility once again.
While international instability and OPEC dominate the oil headlines, fundamentals are still somewhat bearish. OECD crude inventories remain elevated, standing at 3 billion barrels, roughly 275 million barrels above five-year averages. With production cuts of 1.2 million barrel per day and rising U.S. production, OPEC has their work cut out for them in trimming down global inventories. Markets are anxiously awaiting OPEC’s decision in late May on whether to stay the course on production cuts, which have seen 90% compliance rates so far.
Global demand is increasing, albeit at a moderate rate, driven by growth in the U.S., China, and India. The IMF revised its 2017 global growth forecast up to 3.4% in 2017. U.S. unemployment dropped to its lowest rate since 2007, indicating strong demand and higher prices. On the flip side, the Fed raised interest rates again in March, and markets expect two or three more hikes throughout the year, which would be bearish for fuel prices.
Going into Q2, regional factors should play a minimal role in driving local fuel prices, as refineries expect below-average repair downtime this year. The exception to this may be the East Coast, where refinery utilization rates have declined dramatically this quarter.
Overall, the market appears neutral heading into Q2 2017. Expect crude prices in April to trade in mostly the same low-$50s price band, with prices in May and June highly responsive to news about a potential extension of OPEC’s production cut. A price range of $55-$57 is likely should the OPEC and NOPEC deal be extended.
Hedge funds have taken a net-long position for 2017, but analyst forecasts vary greatly. In the short-term, expect market sentiment to continue waiting on more definitive news to give the market direction. Such news is likely to take the form of an OPEC deal extension (or not), but could also come from bearish inventory reports or bullish geopolitical uncertainty.
In this edition of FUELSNews 360°, we’ve taken a deep-dive into fuel taxes and how they affect consumers. Be sure to check out Alan Apthorp’s analysis on fuel taxes to gain better perspective on the evolving fuel tax landscape in the U.S.
We hope you enjoy this quarter’s issue of FUELSNews 360°. Please feel free to email us at email@example.com with feedback, questions, or simply to request additional copies. Thanks for reading!