Energy crunch adds to crude demand
Crude oil markets continue to hold with fundamentals and remain well supported as they await the OPEC+ ministerial meeting that will begin on Oct. 4.
Global oil markets are likely to remain tight enough over the next few months to hold Brent crude oil prices above $70 a barrel, despite the gradual increase of supply from OPEC+.
Crude oil futures prices jumped to their highest point in nearly three years on Sept. 28, boosted by rising investor worries about an energy crunch in several regions and soaring natural gas and electricity prices in Europe and parts of Asia, which could raise crude demand further.
Price strength is driven by several positive factors: Continued decline in COVID cases and the related increase in mobility; ongoing output losses in the Mexican Gulf; gas-to-oil substitution; and the low probability of an Iran nuclear deal.
The use of fuel oil could certainly get a boost from the weather as the northern hemisphere enters winter with gas-to-oil substitution as high as 300,000 barrels per day.
Oil prices rose after sources reported China was prepared to buy more oil and other energy supplies at all costs to meet growing demand from industry, which contributed to offset price pressure from an unexpected rise in US crude oil stocks last week and a strong US dollar.
Money managers increased their positions for the last four weeks as can be seen in the long-short ratio on the Chicago Board of Trade, which reached around seven. If traders continue to add their positions in coming weeks, it may support current oil market sentiment.
The recent easing of the pandemic adds optimism for accelerated economic activity, and would consequently improve the oil demand outlook in the coming weeks. US gasoline fundamentals are weakening seasonally, with US demand falling and gasoline stocks building. This could lead to an easing of refinery throughputs in the coming weeks and could put a cap on prices.
Oil prices have extended gains above long-term equilibrium, reflecting inventory draws seen after hurricanes in the US, along with a dip in global floating storage.
Fuel oil stockpiles in Asia’s storage hub of Singapore dipped to their lowest since September 2019 as South Asian nations bought more for electricity generation in place of costlier LNG. The recovery of air passenger numbers lost pace in August as the spread of the delta variant of COVID-19 weighed on travel plans and led to a modest downtick from July levels, IATA reported.
Refining margins last week declined in the Atlantic Basin. The downturn is attributable to naphtha weakness and higher utility costs linked to the hike in gas prices in Europe as well as weakness on the top section of the barrel amid rising product outputs from USGC as refineries there return from hurricane-related shutdowns.
Oil prices have extended gains above long-term equilibrium, reflecting inventory draws seen after hurricanes in the US, along with a dip in global floating storage, with some added support from global power markets, which may favor oil-fired generation this winter.
However, US hurricane-related tightness is moderating, and oil-for-power demand may not generate deficits beyond the end of the year. If this prevails then OECD inventory deficit may be bottoming.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.