Oil hits multi-year highs as energy crisis intensifies
A shortage of natural gas is creating additional demand for petroleum products like fuel oil and diesel from the power generation sector, coinciding with the rebound in key economies after the pandemic. A deepening crisis in China and other nations with large heavy industry sectors is raising the specter of lower industrial output, weaker economic growth, and with it curtailed fuel usage.China has already said it will allow power prices to rise, removing price caps for energy-intensive firms.
The global energy crisis is bleeding into the oil market
Global benchmark Brent futures topped $ 86 a barrel, hitting the highest intraday level since 2018 as Russia chose to limit gas flows to Europe. West Texas Intermediate crude is nearing a seven-year high.
A shortage of natural gas is creating additional demand for petroleum products like fuel oil and diesel from the power generation sector, coinciding with the rebound in key economies after the pandemic. Meanwhile, the OPEC + alliance is still only adding additional monthly supplies, and some members are not expected to meet current production targets.
“The oil market continues to focus on the current global energy crisis,” said Helge Andre Martinsen, senior oil market analyst at DNB Bank. Record gas prices, the effect of switching from gas to oil and OPEC + ‘s decision not to offer additional volumes are favorable, he added.
Gazprom PSJC, Europe’s largest natural gas supplier, does not plan to send more gas via major transit routes through Ukraine next month, according to the results of several auctions on Monday. It will only send limited volumes via Poland. “Gazprom’s story will only add fuel to the fire,” helping to push up oil prices, said Martinsen of DNB Bank.
Meanwhile, Iran has said talks on a nuclear deal could last for several more rounds. The OPEC member could increase production by 1.3 million barrels per day if US sanctions were lifted, the International Energy Agency said last week.
China’s energy crisis contributed to the slowdown in the country’s economic growth in the third quarter, compared to the same period last year, as power shortages in September forced factories to cut production or shut down completely. Power outages also impacted crude processing last month, with refining rates falling to their lowest level since May 2020.
Power Problems
To be sure, the energy crunch isn’t necessarily a one-way bullish force for oil demand.
A deepening crisis in China and other nations with large heavy industry sectors is raising the specter of lower industrial output, weaker economic growth, and with it curtailed fuel usage.
China has already said it will allow power prices to rise, removing price caps for energy-intensive firms. A raft of Wall Street banks have already cut their 2021 economic growth forecasts for the world’s biggest oil importer.
In Europe too, everything from zinc smelters to carbon dioxide plants have been forced to cut back output at times to some degree, potentially dimming the impact of gas-to-oil switching.
“A lot of energy intensive industry have been forced to stop or reduce their activities due to the high energy cost,” Toril Bosoni, head of the oil markets division at the International Energy Agency said in a Bloomberg Television interview, flagging the risk to oil demand.
For now, though, oil consumption is growing. In Europe, strong mobility data are being replicated in demand figures. Oil products deliveries in Spain last month show gasoline demand 5% higher than 2019, while diesel demand was only 0.5% lower, according to pipeline operator Exolum. The IEA said this week that gasoline demand is now down just 2% on pre-pandemic levels worldwide.
Even aviation is showing signs of life. Air traffic in Europe has recovered to three-quarters of normal levels, up from about half in June. Companies from United Airlines Holdings Inc. to EasyJet Plc have been boosting capacity after the U.S. relaxed travel rules and Europe’s vaccination program has kept cases low.
The uplift to demand from gas-to-oil switching is also showing up in the physical market, where barrels of actual oil are bought and sold.
Sokol oil, a diesel-rich grade from Russia’s east, is trading at the strongest in 21 months. In North Sea market that helps set the world’s benchmark crude price, differentials have been strengthening over the past week with traders citing rising demand from European refiners and declines in November cargo loadings.
With the recovery now becoming broad-based, refiners Repsol SA, OMV AG and Royal Dutch Shell Plc all posted stronger margins in the third quarter, boosting their incentive to churn through more crude.
Sliding Stockpiles
That in turn is helping drive crude stockpiles lower. Satellite tracker Kayrros says global crude inventories, including onshore, oil in transit and floating storage are below pre-pandemic levels. While nationwide U.S. crude stocks rose last week, those at the key storage hub at Cushing Oklahoma fell by the most since June, sparking a volatile week of derivatives trading.
Even with prices nearing $85, speculators remain relatively disinterested in oil, transfixed instead by gas markets, consultant Energy Aspects Ltd. said this week. Speculative length is about $35 billion lower than it was last time Brent got to this level in 2018, it said, meaning that unlike then, a sharp price pullback doesn’t look to be on the cards any time soon.
“Amid low inventories globally, stronger refining margins and gradually eroding spare capacity, only a demand pullback can hold crude prices back over winter,” the consultant’s analysts Amrita Sen and Kit Haines wrote in a note to clients.
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