Oil Market Still Far From Being Back To ‘Normal’

Worry about oil demand sparked by the resurgence of Covid-19 in some parts of the world and a fund selloff in oil futures has reversed the recent price rally. OPEC+ reaching a deal about future production lent an assist.

New Covid-19 infections are on the rise across all 50 states, and there have been jumps in new cases in some European countries as well, notably the UK and France. In the UK, the latest wave is ebbing, according to the latest reports, but optimism is in short supply as it is still unclear why it is ebbing.

Meanwhile, Saudi Arabia and the United Arab Emirates struck a deal about production baselines, so OPEC+ is moving ahead with its plans to release more oil to the market, pressuring prices.

Last week, Reuters’ John Kemp reported in his weekly column, hedge funds and other market makers sold oil and fuel futures at one of the fastest rates in ten years. The total sold was equivalent to 172 million barrels of crude. The most sold contract was West Texas Intermediate, at 74 million barrels, followed by Brent crude, at 51 million barrels.

But besides OPEC+ and new Covid-19 infections, there is also another reason worrying oil traders about the immediate prospects for prices. China is targeting independent refiners with the aim of curbing their output, which is causing a glut.

Earlier this year, the government told state-owned oil majors to stop trading their crude oil import quotas with independents, commonly called teapots, and then, later, it cut the second 2021 batch of crude oil import quotas for teapots by 35 percent. Beijing is also investigating independent refiners for environmental law violations and tax evasion.

This crackdown in independent refiners, combined with higher oil prices, could plunge Chinese oil imports to the lowest in 20 years, Reuters reported earlier this month, citing analysts from Rystad Energy, Energy Aspects, and Independent Commodity Intelligence Services. For now, however, imports continue at a near-record pace.

“There is seemingly a battle within the energy complex between the prevailing supply deficit engineered by OPEC+ and the threat of the COVID-19 Delta variant in regions with low vaccination rates,” Reuters quoted Stone X analyst Kevin Solomon as saying this week.

“The slow take-up of vaccinations will continue to limit some upside in oil demand in those regions, and there will be intermittent spells in the recovery in the coming months,” Solomon also said.

Indeed, oil has yet to come out of the woods. According to Societe Generale, “We think we could be back to a ‘normal’ year at the end of the year in terms of previously recorded values, but the entire oil market is still far from being back to normal. GDP growth has increased oil and product demand, but jet fuel demand will remain an issue although this is showing signs of normalisation.”

And yet it bears noting that although both Brent and WTI took a plunge the day after OPEC+ announced its new agreement, both recovered pretty quickly, suggesting that there exists at least some perception of some resilience in demand, despite the rising Covid-19 case count in key markets such as the United States and parts of Europe.

In the United States, for example, there has been a surge in air travel, which has caused a jet fuel shortage in combination with supply constraints and a labor shortage. In China, refinery run rates hit an all-time high last month, at 14.8 million bpd, supporting prices at current levels.

All in all, the oil picture right now is more mixed than it was a month ago. Whether it would become even more mixed is anyone’s guess amid uneven vaccinations, vaccine opposition, and new Covid-19 infections, without even counting factors such as Iran’s potential return on international oil markets, which by now must be factored into prices.