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Crude Oil: COVID concerns India, Japan is disrupting demand-supply equation

For oil, prices will remain stuck in a range, with optimism around global inventories rebalancing being offset by constant reminders that parts of the world remain far from a full recovery from the pandemic.

May 19, 2021 / 01:42 PM IST
Source: Reuters

Source: Reuters

Oil prices were volatile last week but managed to end on a positive note, reversing some losses. Gasoline demand optimism, the Colonial Pipeline Saga, another drawdown in petroleum stocks all contributed to the rally in WTI prices last week. However, COVID cases continue to surge in India as the pandemic is spreading like wildfire which will bring back concerns of demand recovery. Elsewhere, Singapore will re-impose curbs, Japan plans to extend restrictions and China saw its first coronavirus infections in about a month.

Data from Plats showed that India's diesel, gasoline and jet fuel consumption in the first half of May slumped 20 percent, 20 percent and 38 percent. US credit rating agency Moody's has reduced GDP growth forecast for India for 2021-22 to 9.3 percent from 13 percent earlier because of the economic impact of COVID-19, warning of pressure on the country's sovereign rating. The forecast suggests that India's demand for oil & gas will fall amid the second wave of COVID that has triggered lockdowns across key states since the past few weeks.

For 2021, it now pegs the oil demands growth at 3,50,000 barrels per day, down from a forecast of 4,85,000 barrels per day made in February, translating into a fall of nearly 28 percent. However, once lockdowns are lifted, the pent up demand is expected to spur recovery. Plats forecast global oil demand at 5.5 million barrels per day and expects demand to grow strongly by more than 8 million barrels per day between May to August amid normalization in lockdown measures worldwide.

Iran still remains a major wildcard for the markets as news of Iran looking to persuade its regional rival Saudi Arabia to help it to sell Iranian crude oil on international markets in exchange for limiting attacks from the Iran-aligned Houthi rebels in Yemen on Saudi oil infrastructure. If this happens, Iran can bring 2-3 million barrels per day of oil back in the market and shake off the demand-supply balance.

OPEC meanwhile held its steady demand forecasts for 2021 with expectations for a strong second half of the year as economies continue to reopen. Furthermore, prices got some support due to bullish oil demand forecasts from the IEA which reported that oil demand was already outstripping supply, with a shortfall expected to grow even if Iran increases export as vaccinations against COVID bolster the global economy. IEA reported that output lagged demand by around 150,000 bpd in the second quarter and that shortfall is expected to widen to 2.5 million barrels per day by year's end. An OPEC+ demand forecast for a strong recovery in world oil demand with growth in China and the US outweighing the impact of the crisis in India in its latest outlook also supported prices.

Close

Market sentiments were fuelled by optimism about increasing Gasoline demand in the next two weeks before the May 31st Memorial Day holiday in the US which serves as a time when driving activity picks up as the long summer driving season begins. Data from US Automobile forecast as many as 37M road travellers, up 60 percent compared to the previous year pandemic in this holiday. On the data front, Key US economic readings showed a bigger-than-expected rise in CPI and weekly jobless claims which dropped to a 14-month low while April retail sales unexpectedly stalled, escalating concerns over rising inflation and prospects of higher interest rates. Inflation tends to drive up crude, but knock-on concerns about weaker growth can drag down commodities.

Markets reacted to the shut-down of the US largest refined products pipeline caused by a ransomware attack on their IT systems by the hacker group. The pipeline supplied 45 percent of the refined products to the East Coast. This led to panic gasoline buying and station shortages which pushed retail prices to touch levels of $7 in some parts of the US. Shortly after this, prices tumbled on news of pipelines reopening and supplies disruption easing in the market.

On the geopolitical front, the fight between Israel and Gaza failed to provide any additional support as markets are keeping an eye on the spread of risk in the Middle East which might affect the oil supplies and Geopolitical premium can come into play. Till then, Israel is not even an oil exporter and this will be overlooked by the markets.

EIA reported that Crude inventories decreased by a mere 4,00,000 barrels per day compared to forecast for a drop of 2.2 million barrels per day. Refinery utilization fell 0.4 percent to 86.1 percent from 86.5 percent last week. Gasoline Inventories decreased by 4,00,000 barrels per day and are at 1 percent below the five year average, the level not really required ahead of summer driving season. On the other hand, Distillate remains an outperformer signalling a steady pick up in trucking and other transportation demand. Distillate inventories meanwhile decreased by 1.7Mbpd, 3 percent below the five-year average. The surprising factor was the reduction in US exports last week to 1.8Mbpd from a record of 4.Mbpd, the lowest levels since 2018. Another disturbing news was US production data which increased for the first time in eight weeks to 11Mbpd, though the increase itself was minute and just about 1,00,000 Bpd from a previous 10.9Mbpd.

On the rig's front, the number of rigs drilling crude oil in the US increased by 8 to 352 , the highest since April 2020 for a third week in a row as higher crude prices prompt some drillers to return to the well pad.

Conclusion

For oil, prices will remain stuck in a range, with optimism around global inventories rebalancing being offset by constant reminders that parts of the world remain far from a full recovery from the pandemic. The worsening of the pandemic in India and Japan will turn the whole optimism into a new inventory glut and disturb the supply-demand equation.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Navneet Damani is the VP – Commodity Research at Motilal Oswal Financial Services.
first published: May 19, 2021 01:42 pm

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