Energy markets are witnessing a tug of war on the demand-supply side
Oil prices fell last week amid concerns over macroeconomic developments and lingering fears of a potential global economic slowdown that could reduce demand for energy.
The financial markets witnessed strong selling pressures fueled by growing global growth concerns which could negatively impact energy demand. In addition to the series of interest rate hikes initiated by the US Federal Reserve to address high inflation.
However, the markets remained supported by supply concerns triggered by persistent oil supply disruptions in North Africa and a looming Norwegian offshore strike, which are offsetting bearish market sentiments related to macroeconomic fundamentals.
Signs of strong crude demand in the physical market also added support. Backwardation of the curve has strengthened, indicating the market is still well supported. The forward curve of crude future contracts reflects the market perception of tight oil market outlooks in the short term.
On the demand side the short-term outlook remains robust, overall supporting the market. Oil prices rebounded on improving market sentiment after the sell offs in financial markets were halted.
China’s independent refiners boosted average utilization rates in June amid rising refining margins. Demand for diesel and gasoline in India remained strong in June, thanks to a pickup in economic activity, travel over the summer holidays and agriculture.
Market sentiment was also bolstered by news that China continued to ease COVID-19 related restrictions, while Beijing and Shanghai declared they had no new COVID-19 cases.
Chinese purchase of crude oil appears to be on the rise, revealed by a sharp jump in the number of vessels assigned to carry crude to China in the second half of July. Exports to China are set to exceed 9 million barrels per day in two weeks’ time, with the bulk coming from the Middle East.
Russian crude exports to non-Commonwealth of Independent States destinations fell to 5.1 million barrels per day in June, but were still up on a yearly basis. The Group of Seven economic powers however have agreed to explore imposing a ban on transporting Russian oil that has been sold above a certain price.
In Ecuador, anti-government protests –– which briefly led to a 50 percent drop of crude production in the country –– ended on June 30. Ecuador’s crude production has recovered quickly since then and was almost back to normal levels at about 500,000 barrel per day. Whereas Libyan crude output is averaging at 400,000 barrels per day at best.
The energy market is starting to price a risk of a complete disruption to gas supplies for winter. Most concerns however are mainly centered around the skyrocketing price of electricity.
Gas supplies to Europe may continue. The Nordstream pipeline is set to shut for ten days during the period of July 11-21 for regular maintenance. The international press reports are suggesting that authorities are attempting to find a solution on sanctions restrictions to move gas turbine components back to Russia.
Russia has already cut gas supplies to buyers in Poland, Bulgaria, Finland, the Netherlands, and Denmark over refusal to pay in ruble.
The outlook is still uncertain and would drive price volatility. Force majeure on some oil fields and export terminals in different regions could pressure oil supply and provide support to crude prices, if the outages persist.
The holiday season and an expected increase in air travel could support demand for refined products in Europe, providing strong support for refining margins amid robust gasoline and distillate cracks. However, inflationary pressures across the world will continue to undermine oil and gas company growth prospects in the coming months.
While a global economic slowdown is looming and the risk of recession is growing, this is partly countered by continued recoveries in mobility. Demand growth within 2 million barrels per day is there. However, in the event of a deep recession, demand destruction slowing growth could conceivably drop significantly, depending on the Russian supply situation.