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The oil market had been struggling to break through resistance levels, as it weighed bearish outlooks on global economic growth due to high inflation, a strong US dollar, and additional supply from the US strategic petroleum reserves and the uncertainty surrounding Russian oil supply. Price action suggests those fears are now fading.
Industry sources have issued varying forecasts for 2022 oil demand growth ranging between 2.5 million barrels per day to 3.4 million bpd. The forecasts are influenced by uncertainty over the growth of the global economy with an emphasis on China's virus lockdowns weighing heavily on the global supply chain system. The market, however, is well supported by higher refining margins on shortage of products.
Supply
On the supply side, with EU negotiations on a proposed ban on Russian crude imports now looking likely to drag on beyond May 31, uncertainty over Russian crude trade is set to last for longer than expected and this could keep trade friction in place a while longer too supporting prompt prices and time spreads.
Russia’s Oil Ministry is anticipating up to 2 million bpd of lost output this year. However, so far, disruptions to Russian production since Russia’s Feb. 24 invasion of Ukraine have been much lower than was anticipated.
The proposed EU embargo on Russian oil will leave up to 2 million bpd of Russian crude looking for new outlets. India has absorbed most of the Russian crude shunned in the West, and is publicly negotiating future supply deals with Russia.
With indications that China has stepped up its purchases of Russian crude, the Brent physical market may continue to look tight, partly because European crude buyers will be rushing to secure Russian replacement barrels from the Middle East, West Africa and the US.
Brent/Dubai is likely to benefit as Europe replaces Urals with lighter crudes. European refiners are replacing lost Urals imports with mostly light crudes rather than sours—with the high sulfur content of Middle Eastern medium and heavy sours a key barrier—in turn flooding the market with naphtha.
Oil prices
Well over two months into Russia’s invasion of Ukraine, global markets remain tense, with oil prices holding firmly above $100 per barrel.
The call to secure global energy supplies is getting more relevant than ever, with new actions adding to uncertainty, including a potential EU embargo on Russian oil on the horizon.
During the fourth quarter earnings season, which coincided with the beginning of the invasion, many US shale companies reaffirmed their commitment to disciplined spending programs and modest growth, given the continued pressure from shareholders to improve returns.
Globally, the gasoline complex will remain tight during the US summer driving season, which typically begins after the Memorial Day holiday on May 30. According to Google, global mobility has recovered to above pre-pandemic levels for the first time since early 2020.
As refineries across key regions conclude maintenance from June, global refinery runs should rise from June and refiners will likely shift some yields back toward gasoline production. Gasoline cracks to pull back in the near term, with upside likely to come from strong demand data and/or more refinery outages.
Air travel recovery in Asia is lagging due to prolonged lockdowns in China.
Full recovery in jet fuel demand this year as China is sticking to its “zero-COVID-19” strategy.
The government will continue imposing localized lockdowns and restrictions to curb the spread of COVID-19, which will sustain the downward pressure on domestic air travel demand.
The Middle East is also starting to witness an uptick in LNG demand, as the cooling season gets underway.
Typically a seasonal LNG importer, the region often sees increasing demand when temperatures rise over summer; with Kuwait and the UAE importing most of the supply in recent years. Kuwait remains the region's dominant LNG importer, followed by more modest import volumes into the UAE.
US refiners
US refinery throughput continued to rise as refiners return from maintenance. This trend is expected to continue to alleviate some tightness in product markets, and may limit the rise in product prices.
China rolled out a broad package of measures to offset the damage caused by COVID-19 lockdowns. It would support businesses and stimulate consumption in the months to come. Money managers and hedge funds are significantly raising net long positions. If this trend continues, this may put support on crude prices.
However, economic uncertainty, a rise in Chinese COVID-19 cases and the ongoing oil supply from US SPR capped the oil prices surge.
The recent uptick in COVID-19 infections, leading to lockdowns in major cities of mainland China, resulted in renewed supply chain pressures. Further, price pressures in the developed markets may have contributed to a slowdown in both manufacturing and services purchasing managers Index (PMI) around the world.