Understanding the oil market dynamics amid energy crunch

Understanding the oil market dynamics amid energy crunch

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The ongoing natural gas crisis in Europe and Asia is helping oil prices stay firm. Crude oil futures prices soared, touching new highs as the oil market remained supported by concerns over a growing power crisis in key European and Asian countries, including China and India, which will boost demand for alternative power sources such as diesel.

The global energy crunch may appear to be supported crude demand and the pushing up of prices, but the overall impact on the world’s economic growth is negative. China’s lower crude imports in September and profit taking by some traders as prices rose to multiyear highs also weighed on oil prices. China’s crude imports fell 5 percent in September from a five-month high to around 10 million barrels per day. However, oil prices were also affected by a stronger US dollar and downward revision of global economic growth by the International Monetary Fund.

The IMF trimmed its 2021 global growth forecast to 5.9 percent from the 6 percent forecast it made in July, and left the 2022 global growth forecast unchanged at 4.9 percent, citing persistent supply chain disruptions and inflation pressures as factors constraining the global economic recovery from the coronavirus disease pandemic.

OPEC+, on the other hand, is doing everything to ensure that the oil market is completely stabilized. “Our position is to increase production in accordance with the growing needs of the market,” Russian President Vladimir Putin told an energy forum in Moscow last week.

EIA report

The EIA monthly report indicated that US crude oil output will fall more than previously expected in 2021 and bounce back in 2022. Crude output will drop 260,000 bpd to 11.02 million bpd this year, and then rebound to 11.73 million bpd in 2022.

Refiners in all regions are now running at a profit. In the US, the positive crack spread at the top and middle section of the barrel offset weakness from residue. Refining economics in Europe were supported by lower products supply after several major European plants shut down for maintenance. 

Preparations for the winter season amid concerns of an energy crunch in the power sector are likely to boost flows of fuel oil and diesel into Asia.

Mohammed Al-Shatti

Product markets in Asia were backed by robust road fuel demand, as well as cuts in Chinese refinery throughput due to power rationing. Refined products are all trading in backwardation. The premium for prompt cargoes signals an undersupplied market where the balance of demand is met by taking fuel out of storage.

Inflation

Inflation has surged in major economies. In the US, consumer price inflation jumped to 5.4 percent year-on-year in June and July and 5.3 percent in August — levels not seen since July 2008. Similar trends are being seen in the EU and the UK.

Ongoing supply-chain bottlenecks, labor market shortages, substantial monetary stimulus, and rising energy prices, together with pent-up demand, a strong economic rebound and base effects have all contributed to the rise in inflation.

Global mobility, an indicator for gasoline and on-road diesel consumption, averaged 8.1 percent below pre-COVID levels in most of the world’s top oil users in the week to Sept. 30, lending support for transportation fuel demand.

Strong refinery demand in the US will likely result in a reduction in crude oil inventory levels, providing support to crude oil prices in the coming weeks.

Preparations for the winter season amid concerns of an energy crunch in the power sector are likely to boost flows of fuel oil and diesel into Asia, particularly as China’s product exports are expected to fall sharply.

Europe is in greater need of LNG, just when North Asian markets are importing 12 percent more year on year. European conventional gas storage is considerably lower than at the same time in 2020. Although low, European gas storage is not at record lows — October inventories were lower in 2012 and 2013.

• Mohammed Al-Shatti is a Kuwaiti oil analyst.

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view