The dominating theme in crude oil markets is that there are too many competing narratives and driving factors to allow for anything approaching a clear view of the path ahead.
And in what is probably an ironic outcome, prices are likely to remain locked in the same relatively narrow band that has prevailed for much of this year as market participants wait for some of the fog to lift.
There was no clear consensus on how the various influences would play out when the oil industry held its annual gathering this week in Asia, the top-importing region and the likely driver of global crude oil demand for the coming years.
“Uncertainty” was the key word used at the APPEC event hosted by S&P Global Commodity Insights in Singapore, with one speaker even going as far as to describe the current market situation as chaotic.
So, what are the main issues clouding the crude oil market, both for the short and longer terms?
This is by no means an exhaustive list, but it reflects the buzz at the conference and associated briefings.
- What will OPEC+ do with its output policy in 2024? How long can the exporter group maintain cohesion and surrender market share to producers outside the club, such as the United States and Brazil?
- What will happen to Chinese oil demand? Will the anticipated rebound in the world’s biggest importer actually happen in 2024?
- Related to Chinese demand is the issue of the country’s exports of refined products. Will these increase given the apparent slack domestic consumption as refiners seek to maximize throughput and seize some of the high profit margins for fuels such as diesel?
- How does the increasingly split market for global crude evolve given the parallel pricing and trading for oil from Russia, Iran and Venezuela, all of which are under some form of Western sanctions?
- Can the developed world achieve the much sought after soft economic landing, which history suggests is extremely hard to pull off?
- Even if a soft landing can be achieved, interest rates may stay elevated for an extended period, which eventually flows through into crude trading. It becomes more expensive to finance both paper and physical trades, and holding inventories, especially in a backwardated market, makes little sense. Does this mean the decline in crude and product inventories is more related to financing issues, or is it driven by OPEC+ production cuts?
- How does the change in the main global price benchmark of Brent affect trading? In effect, has Brent become merely a price reflecting the cost of WTI Midland delivered to Rotterdam given that since the U.S. crude was added into the benchmark it has come to dominate the physical deliveries?
- The OPEC+ output cuts have distorted the physical markets insofar as they have lowered the availability of sour grades, resulting in many refiners running sub-optimal slates of crude and producing too much naphtha and gasoline and not enough diesel and jet fuel.
- A longer-term concern is the switch to electrifying the vehicle fleet, especially in China. This is likely to result in Chinese refiners producing way more gasoline than needed in the domestic market, potentially leading to higher exports.
This list of concerns stands in direct contrast to last year’s APPEC, when the conversation was completely dominated by the energy crisis created by Russia’s invasion of Ukraine.
This year, the invasion and its aftermath were barely mentioned, and if it did merit discussion it was only to reflect that by and large the market has adjusted and Russian crude and products are still finding a way into the global market, albeit in a less efficient manner than prior to the February, 2022 attack.
It’s interesting to note that while oil market participants could largely agree on the myriad of issues facing the industry, there was divergence when it came to assessing the impact of each issue and the likely impact it will have.
Some saw OPEC+ holding steady and keeping supply tight in order to keep the Brent price closer to US$90 a barrel rather than US$70.
China is either a beacon of strength for crude demand or it may be weaker than expected, and any increase in crude imports is either flowing into storage tanks or being exported as refined fuels.
Throw in a high degree of uncertainty over the global economic outlook and the likelihood of a period of sustained high interest rates and a strong U.S. dollar and the crude oil market is facing a plethora of issues.
It’s likely that over time most of these issues will become clearer and their influence can be more accurately assessed, but for the moment the oil market seems to think that as far as the price is concerned, in chaos there is stability.
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