Uncertainty clouds global oil market outlook
As expected, the OPEC+ agreed on an additional increase of 432,000 barrels per day during June to support the global oil supply.
It would provide relief amid concerns over an EU plan to phase out imports of Russian oil. Oil futures also rose after the weekly report of the US Energy Information Administration showed a large drop in US gasoline and middle distillate stocks last week, underscoring tight oil product markets, which offset an unexpected build in the US crude stocks
Additionally, a surge in the diesel market amid tight supplies and a decline in US gasoline and middle distillates stocks last week lend support to the market. However, the ongoing COVID-19 lockdowns in China clouded mobility and oil demand outlooks, thus limiting a further rise in oil prices.
However, the strengthening US dollar against a basket of other major currencies and a drop in global equity markets put downward pressure on oil prices and limited gains.
With traditional markets in Europe increasingly moving away from Russian oil, the country is looking toward Asia to compensate for its losses.
India, in particular, has expressed an interest in bringing in more Russian crude at a time when Russia’s key export grade, Urals, is trading at the largest discount on record, around Dated Brent minus $39.40 per barrel CIF Rotterdam.
Refinery margins in the US Gulf Coast extended their upward trends supported by a slight decline in nationwide refinery run rates while inventories for most products continued to contract. In Rotterdam, margins rose with most of the strength coming from the middle distillates as ongoing adjustments in product trade flows in Europe continued to exert upward pressure on fuel prices. In Asia, higher refinery run rates in Japan and India amid an ongoing COVID-19 fuel demand contraction in China led to pressure on product crack spreads, which limited Singapore margins.
With most commodity markets already experiencing tight supply, the war in Ukraine ignited a strong rally on top of prices that were already high, and justifiably so. The continuing upward price trend and tight markets are detrimental to carrying strategies.
The president of the EU Commission proposed phasing out imports of Russian crude within six months and refined products by the end of the year. The increasing possibility of an EU embargo on Russian oil imports might phase out Russian diesel exports to Europe and lead to higher oil prices in the coming weeks.
Despite robust first-quarter profits, US shale producers are still reluctant to increase production amid shortages of labor and materials, as well as demand headwinds due to the ongoing lockdowns in China, and instead are boosting dividends.
The industry is also watching the developments of the No Oil Producing and Exporting Cartels Act, which would enable US prosecutors to sue foreign entities in US courts for anti-competitive behavior in oil markets. However, it is believed that it may not pass. The latest US congressional effort to apply US anti-trust laws against the Organization of the Petroleum Exporting Countries will have unintended consequences complicating President Joe Biden’s efforts to stabilize global oil markets, according to the White House.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.