Oil proponents are beginning to envision a world in which China, the engine of demand growth, returns to the market.
And if his analysis is correct, the summer is going to be painful for oil consumers around the world.Already facing spiraling prices, with Americans paying about $5 a gallon for petrol, or Britons spending more than £100 ($125) just to fill up a regular car.
In China, new restrictions imposed in Shanghai point to a bumpy road, but the world’s largest crude importer is timidly emerging from its latest battle with Covid-19.. That will add consumption to a market that has traded around $120 a barrel for its longest run in years, with little help from China.
“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 capacity, the economy is strong outside of China, China is coming back now and we are in the middle of a global oil outage.”
OPEC+ officials said this week there is little additional supply they can add, while similar constraints on the world’s oil refinery fleet mean consumers are grappling with fuel prices that are rising even faster than crude.
Several countries have announced embargoes on Russia, one of the world’s largest producers, following its invasion of Ukraine. That is disrupting available supplies of crude oil and fuels. Consumption of refined products has outpaced production, further eroding inventories.
Much of Wall Street shares 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 its most bullish scenario of $150 could go higher. The Brent record is $147.50, set in July 2008.
China National Petroleum Corp. estimates that the country’s consumption could rise 12% in the third quarter. Bank of China International said it expects a modest recovery in the third quarter, and a stronger fourth.
“We’re at $120 without China, so when China comes back, oil is going to go higher,” Amrita 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 governments around the world are subsidizing prices.”
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Those subsidies – or tax cuts – are boosting demand in countries from Mexico to South Africa. That’s one of the reasons 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 $170. The premium for both diesel and gasoline over crude has reached a record this year in the US and Europe, with fuel stocks low ahead of the summer.
reached the limit
Some of the leading political figures in the market agree that the world currently does not have enough refining capacity.
Amos Hochstein, the State Department’s senior adviser on energy security, told an RBC Capital Markets conference this week that underinvestment in the energy sector and the downward trend in refining capacity have contributed decisively to fuel shortages, echoing the opinion of the Saudi Arabian Minister of Energy. The Biden government has even raised with the US refinery 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 – could derail the bull market.
OPEC Secretary General Mohammad Barkindo said this week that only two or three members of the group have room to increase production.
The others are “on the edge,” he said. “The world has to come to terms with this brutal fact.”
Even with some parts of Shanghai going back into Covid restriction, Traders believe that an eventual uptick in consumption will come in an oil market where production is, for now, largely depleted.
For consumers, that’s especially risky heading into the summer, when consumption of refined products rises thanks to travel and air-conditioning demand.
The United Arab Emirates, which was also less than optimistic about how much supply 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 said at a conference in Jordan on Wednesday. “If we continue to consume, with the rate of consumption that we have, we are nowhere near the peak, because China is not back yet.”