Oil volatility continues to cast its shadow over markets
Oil prices continue to be volatile, even though refining margins have recovered significantly and crude prices are well supported. This is due to a weakening global outlook as the prospect of slowing oil demand growth, particularly in China, is balanced against geopolitical tensions in Eastern Europe.
The wider market has come under pressure from several different developments. The resurgence of COVID-19 cases in China and worries about lockdown restrictions worsened the demand outlook and triggered a sharp selloff across international indices. The strengthening of the dollar and potential US interest rate increases also weighed on oil prices.
However, the decline was limited amid a smaller-than-expected build up of US crude stocks and a decline in oil product stocks. The prospect of a financial stimulus from China’s central bank and developments regarding potential EU sanctions on Russian oil exports, also helped limit oil declines.
China’s crude throughput is set to reach a two-year low in April as state and independent refiners have slashed output because of the latest pandemic resurgence and planned maintenance work.
Concerns about market disruptions support oil prices. Europe is expected to suffer from any market shortfall — given it is a major buyer of Russian crude, with flows averaging 2.7 million barrels per day, representing 32 percent of the region’s total imports.
Moreover, Kazakhstan’s top oil producer, the Chevron-led Tengizchevroil consortium, said that work had returned to normal at the port of Novorossiysk on Russia’s Black Sea coast after more than a month of disruption attributed to storm damage.
Money managers continued to cut their net long positions related to WTI crude, probably due to rising prices and some profit-taking. However, speculators raised their net long positions last week related to Brent crude, amid concerns about oil supply in Eastern Europe and North Africa.
According to industry sources, Indian refiners, who bought 16 million barrels of Russian crude in 2021, will take delivery of 40 million barrels over May and June after values plunged. Private refiners bought more than half the contracted Russian crude volumes, with the rest purchased by state refiners.
In the meantime, the following will certainly limit the upward trend in prices. Declining refinery runs in Russia and China, as well as weakening gasoline demand in China as the country extends COVID-19 restrictions in major cities, could exacerbate upward pressure on fuel prices in the near term.
Pandemic lockdowns and surging energy prices hit Chinese oil demand in March, and April numbers will likely show a further fall as restrictions continue. Apparent oil demand in March fell 3 percent from the first two months of the year to 13.9 million barrels per day. Asia faces inflation pressures according to the International Monetary Fund, which points to the Ukraine war, soaring commodity prices and China’s economic slowdown as risks to the region.
India’s overall crude runs eased to 106 percent in March, from 107 percent in February, the latest survey from the nation’s oil ministry showed. Analysts expect robust margins and a sustained revival in demand for oil products to lift year-on-year growth in throughput to double-digit highs.
US diesel availability has seen an ongoing contraction as stocks fell mid-April, while American Petroleum Administration for Defense 1 stocks are down to almost half of their level a year ago. This should incentivize stronger diesel production, and thus lend support to US refinery intakes over the coming weeks.
While inflation and geopolitical developments in Eastern Europe may dampen business and consumer activity, particularly in the second half of this year, the underlying momentum in both areas has held up well so far, especially when balanced against an uptick in global service activity that will support the global economy.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.