A nightmare summer is approaching for gasoline consumers

Bloomberg — Those who forecast oil hikes begin to imagine a world in which China, the engine of demand growth, returns to the market.

And if your analysis is correct, summer is going to be painful for oil consumers around the worldwhich already face spiraling prices, with either Americans paying $5 a gallon for petrol, or Britons spending more than 100 pounds ($125) just to fill up a regular car.

In China, new restrictions in Shanghai point to a bumpy roadbut the world’s largest crude importer is timidly emerging from its latest battle against Covid-19. This will add more consumption in a market in which a barrel has been quoted at US$120 for the longest period in recent years, and in which China has not had much to do.

“I have never seen this combination of circumstances in my career over the last 50 years,” said Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors LLC. “The world has very little spare capacitythe economy is strong outside of China, China is coming back now and we are in the midst of a global oil disruption.”

OPEC+ officials said this week there is little additional supply that can contribute, while similar constraints on the world’s oil refinery fleet mean consumers are faced with fuel prices rising even faster than crude oil.

Several countries have announced embargoes on Russia, one of the world’s largest producers, following its invasion of Ukraine. That has disrupted available supplies of crude and fuels. Consumption of refined products has outpaced production, further depleting inventories.

Most on Wall Street share the bullish view. This week, Goldman Sachs Group Inc. said it expects Brent to hit a high of $140 a barrel. in the coming months. Morgan Stanley said his most bullish scenario of $150 could be higher. The Brent record is $US147.50, set in July 2008.

The rebound

China National Petroleum Corp. estimates that the country’s consumption could increase 12% in the third quarter. Bank of China International said it expects a modest recovery in the third quarter, and a stronger fourth.

“We are at $120 without China, so when China comes back, oil will go higherAmrita Sen, chief oil analyst at consultancy Energy Aspects Ltd., told a conference in Calgary. “Even with the high prices, the demand continues because people want to travel, they want to go out. And the second thing is that the governments around the world are subsidizing prices”.

These subsidies — or tax cuts — are driving demand in countries from Mexico to South Africa. This is one of the reasons why oil prices have held up despite US gasoline futures already trading near $180 a barrel.

Russia is a major supplier of refined products, especially diesel, whose wholesale prices in Europe are around US$170. The premium for diesel and gasoline over crude oil has hit a record high this year in the US and Europe, with fuel stocks low heading into the summer.

To the limit

Some of the leading market officials agree that the world does not currently have enough refining capacity.

Amos Hochstein, the US State Department’s senior adviser on energy security, told an RBC Capital Markets conference this week that the low investment in the energy sector and the downward trend in refining capacity have contributed decisively to the fuel shortage, echoing the view of the Saudi Arabian energy minister. The Biden government has even raised with the US refining industry the possibility of restarting the paralyzed plants.

What all of this means is that, despite the Organization of the Petroleum Exporting Countries and its allies pledging to increase production more than forecast earlier this month, there is little indication so far that such measures — if that occur — cause the bull market to derail.

OPEC Secretary General Mohammad Barkindo stated this week that only two or three of the group’s members have room to increase production.

Even with some parts of Shanghai returning to restrictions due to Covid, traders believe an eventual pick-up in consumption will come in an oil market where production is, for now, very depleted.

For the consumers, this is especially risky in the face of summerwhen the consumption of refined products increases thanks to travel and the demand for air conditioning.

The United Arab Emirates, which was also not very optimistic about the amount of supply that growers can add to the market, offered the starkest warning that it could be a long summer ahead.

“We have to remember that China is not back yet,” UAE Energy Minister Suhail Al-Mazrouei told a conference in Jordan on Wednesday. “If we continue to consume at the same rate, we are not even close to the peak because China is not back yet”.

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