Oil demand destruction – a misleading premise

Oil prices ended the flattest fluctuated week in two months. Oil prices deteriorated and ended the 8th volatile week on downturn momentum but international benchmarks still above the $100 mark. Brent crude price ended the week at $106.65 per barrel. WTI crude price ended the week at $102.07 per barrel.

Oil prices downward movement wasn’t because of oil demand destruction fears but because of slowdown in speculators activities as long positions on CFTC have dropped for the 4th consecutive week.

The latest figures from the Commodity Futures Trading Commission (CFTC) on April 19, 2022, showed that long positions on crude oil futures on the New York Mercantile Exchange (NYMEX) at 424,321 contracts, down by -8,761 contracts from the previous week (1,000 barrels for each contract). This means that speculators are still cautious in such volatile and uncertain price fluctuations era.

Market fundamentals remain extremely strong. However, whenever oil prices move downward, this is attributed to bearish sentiments that fade away momentarily whenever prices take an upward movement. Hence, oil demand destruction fears used as bearish sentiments while demand destruction fears won’t sustain in dragging oil prices lower amid such critical time in the history of energy markets and the real fears of an upcoming catastrophic supply shortage risk.

It is imprecisely expected that Libyan crude oil output disruption would add a further bullish sentiment to what is believed as an already undersupplied market. However, the market has become somewhat inoculated to Libyan supply issues because of the ongoing political upheaval and conflict since 2011.

Libyan crude oil is a light sweet crude that is similar in specification to US shale oil. If it were more similar to the Arabian Gulf sour crude grades, the situation would be very different as this type of oil cannot be easily replaced. Still, nowadays, even the light sweet crude might face supply shortages.

Taking into consideration that Libya was not part of the OPEC+ output calculations because of ongoing political unrest in the country which would have made any commitment unenforceable. Thus far, it remains questionable if the increase or decrease in Libyan supply would affect the global market.

Faisal Faeq

Energy Adviser (former OPEC and Saudi Aramco)

Twitter: @FAISALFAEQ