Oil prices had their biggest weekly drop this year, which broke the two-month price rally, as the oil demand recovery in China and the US remained fragile. In addition, the stronger US dollar weighed on commodity prices, particularly oil.
Brent crude prices ended the week lower at $64.53 per barrel. The price of West Texas Intermediate (WTI) crude also deteriorated to $61.42 per barrel. On Thursday, prices had their biggest single-day loss since last April 2020, but the decline cannot be blamed on new lockdown measures in Europe; the correction was due to the fact that market participants finally realized the price rally was based on improvements in sentiment and not fundamentals.
This market fragility proves that the Organization of the Petroleum Exporting Countries’ (OPEC) caution on increasing production was absolutely right, after the unjustified optimism of previous weeks as prices had been moving upward since the beginning of the year.
The US crude oil inventories rose above the psychologically important half-a-billion barrel mark. US crude inventories rose for the fourth straight week, up 2.4 million barrels to 500.8 million barrels, which is nearly 7 percent above the five-year average, opening the door for a wide surplus.
The International Energy Agency’s (IEA) monthly report was bearish for the second quarter. The agency questioned the previous bullish oil recovery outlook, when prices were thought to have entered a sustained period of rises, as oil inventories still looked ample. The IEA counter-argued that global oil markets are adequately well supplied and there is plenty of oil to meet the demand, with more than enough oil in tanks and under the ground, despite the steady declines in the Organization for Economic Co-operation and Development (OECD) stocks.
IEA reported that OECD oil inventories declined for the sixth consecutive month in January, with a monthly decline of 14.2 million barrels to 63.2 million barrels, above their 2016-2020 average. The IEA forecasts demand to grow by 5.4 million barrels per day (bpd) this year.
Chinese crude oil imports are likely to fall as refining throughput is expected to slow in the second quarter for the regular spring maintenance season. The weakening refining margins will probably extend such maintenance periods.
This will have a huge impact on oil demand, as China’s daily refinery throughput rose 15 percent in the first two months of the year. Consequently, Chinese refining capacities should slip to below the 13.5 million bpd level through mid-May, so the petroleum refined products inventories should see some significant drawdowns during the maintenance period.
• Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco.