Oil prices recovered swiftly amid market vulnerability to supply risk

Despite the demand destruction fears amid high oil prices, and despite the injected bearishness amid lockdowns in China, oil prices have recovered last two weeks’ losses and ended the 7th volatile week on the rise. A $10 weekly price fluctuation has become a norm. Brent crude price closed the week at $111.70 per barrel, WTI crude price broke the $100 mark and closed the week at $106.95 per barrel.

Unexpectedly, the surge in refined product prices has been following the upward momentum in oil prices only, while the downturn is disregarded. This has been widely noticed in the disproportionate rise in product netbacks relative to crude prices.

The earlier bearish sentiments have been overshadowed by the global energy markets vulnerability to supply shortage risk as it would be impossible to increase crude oil output enough to offset any shortage in Russian crude oil and petroleum refined products supply.

OPEC also reported surging refining margins in all markets, as product prices soared in response to a growing product supply-demand imbalance. More interestingly, OPEC reported that the decline in total product refining output levels, amid the onset of a heavy turnaround season, resulted in a notable and disproportional rise in product netbacks relative to crude prices. This has been mostly encountered in the contracting middle distillate availability beyond the already low levels. This resulted in massive upward pressure on product prices and the robust performance of middle distillate markets, particularly in Europe.

The diesel shortage has been exacerbated because of the shortage of diesel cargoes from Russia, this came while the world might be facing a serious diesel shortage as global diesel stocks have fallen to their lowest since December 2018. Russian diesel accounts for half of Europe diesel imports of around 700,000 barrels per day. S&P Global Platts reported an unprecedented tightness in middle distillates across the globe, low-sulphur diesel continues to trade at a widely steep premium vs Dated Brent, currently at around $38 per barrel.

As the peak heavy refinery turnaround season in April, which is expected to drive global offline capacity of around 5 million barrels per day (bpd), it’ll be interesting to see how the market will react to the return of these barrels of capacity for operations by July 2022 during the peak summer high demand season for gasoline.

OPEC reported total OECD commercial oil stocks down by 22.8 million barrels, in February at 372 million barrels less than the same time one year ago, 334 million barrels lower than the latest five-year average, and 321 million barrels below the 2015-2019 average.

The latest figures from the Commodity Futures Trading Commission (CFTC) on April 12, 2022, showed that long positions on crude oil futures on the New York Mercantile Exchange (NYMEX) at 433,082 contracts, down by -1,395 contracts from the previous week (1,000 barrels for each contract). Speculators are still cautious in such very volatile price fluctuations.

Faisal Faeq

Energy Adviser (former OPEC and Saudi Aramco)

Twitter: @FAISALFAEQ