The global energy crisis is bleeding into the oil market.
Brent crude surged as high as US$85.10 a barrel on Friday, a price that would have seemed unthinkable just 18 months ago, when COVID-19 halted global mobility and trashed demand.
An underlying recovery in consumption — driven by road-fuel, freight activity and latterly air travel — is now being fired by the energy crisis.
With natural gas trading at close to US$200 in per-barrel terms in Europe, the consensus among analysts is that oil demand globally would be boosted by a further half a percentage point as companies rush to secure any fuel that can be used as a substitute, from diesel to fuel oil to crude.
To outsiders, such a shift might seem tiny. In practice it is transformative, exceeding a month’s output increases that OPEC and its allies are aiming to bring to a market that was already churning through its stockpiles.
West Texas Intermediate crude for November delivery on Friday rose US$0.97 to US$82.28 a barrel Friday, up 3.7 percent for the week.
Brent crude for December delivery on Friday rose US$0.86 to US$84.86 a barrel, rising 3 percent weekly.
“The situation is tight and OPEC is overtightening,” said Gary Ross, a veteran oil consultant-turned-hedge fund manager at Black Gold Investors LLC. “The broader energy problem is making things worse because you’re getting substitution on top of seasonal demand increases. This is quite an explosive situation.”
Oil refiners are making as much money as at any time since the pandemic began. Gasoline margins in the US are rallying at a time of year when they would normally fall. In Europe, profits from making diesel are the highest since March last year, while propane and low-sulfur fuel oil prices have been rocketing to their highest since 2014.
Nowhere is the strength in oil clearer than in the futures curve, used by traders to wager on the health of the market. Nearby prices are trading at their biggest premiums to those further out in years, with the closely watched Dec-Red Dec spreads on Brent crude and European diesel at their strongest since 2013. Such a pattern, known in industry jargon as backwardation, indicates relative scarcity of supply.
Those signs of strength in the futures market reflect what most analysts see on paper — supply exceeding demand by about 1 million barrels a day in the fourth quarter.
To be sure, the energy crunch is not necessarily a one-way bullish force for oil demand.
A deepening crisis in China and other nations with large heavy industry sectors is raising the specter of lower industrial output, weaker economic growth and with it curtailed fuel usage.
China has already said it would allow power prices to rise, removing price caps for energy-intensive firms.
A raft of Wall Street banks have already cut their economic growth forecasts for the world’s biggest oil importer next year.
In Europe, too, everything from zinc smelters to carbon dioxide plants have been forced to cut back output at times to some degree, potentially dimming the impact of gas-to-oil switching.
“A lot of energy-intensive industry have been forced to stop or reduce their activities due to the high energy cost,” Toril Bosoni, head of the oil markets division at the International Energy Agency (IEA) said in a Bloomberg Television interview, flagging the risk to oil demand.
For now, though, oil consumption is growing. In Europe, strong mobility data are being replicated in demand figures. Oil products deliveries in
Spain last month show gasoline demand 5 percent higher than 2019, while diesel demand was only 0.5 percent lower, according to pipeline operator Exolum.
The IEA said this week that gasoline demand is now down just 2 percent on pre-pandemic levels worldwide.
Even aviation is showing signs of life. Air traffic in Europe has recovered to three-quarters of normal levels, up from about half in June. Companies from United Airlines Holdings Inc to EasyJet PLC have been boosting capacity after the US relaxed travel rules and Europe’s vaccination program has kept cases low.
The uplift to demand from gas-to-oil switching is also showing up in the physical market, where barrels of oil are bought and sold.
Sokol oil, a diesel-rich grade from Russia’s east, is trading at the strongest in 21 months.
In North Sea market that helps set the world’s benchmark crude price, differentials have been strengthening over the past week, with traders citing rising demand from European refiners and declines in November cargo loadings.
With the recovery now becoming broad-based, refiners Repsol SA, OMV AG and Royal Dutch Shell PLC all posted stronger margins in the third quarter, boosting their incentive to churn through more crude.
Additional reporting by AP
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