Oil jump to $ 85 shows ripple effect of energy crisis

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Oil jump to $ 85 shows ripple effect of energy crisis

By Alex Longley

(Bloomberg) –

The global energy crisis is spreading in the oil market.

Brent crude hit $ 85.10 a barrel on Friday, a price that would have seemed unthinkable just 18 months ago, when Covid halted global mobility and destroyed demand.

An underlying recovery in consumption – driven by road fuels, freight activity and, most recently, air transport – is now triggered by the energy crisis. With natural gas trading at nearly $ 200 a barrel in Europe, the consensus among analysts is that global demand for oil will rise an additional half a percentage point as companies rush to get any fuel they can find. used as a substitute, from diesel to oil to crude.

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To outsiders, such a change may not seem like much. In practice, this is a transformative transformation, surpassing the month-long production increases that the Organization of the Petroleum Exporting Countries and its allies aim to bring to a market that was already building up stocks. .

“The situation is tense and OPEC is tightening,” said Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors LLC. “The larger energy problem makes it worse because you get substitution on top of the seasonal increases in demand. It’s a pretty explosive situation.

Oil refiners are making as much money as at any time since the start of the pandemic. Gasoline margins in the United States are recovering at a time of year when they are expected to decline. In Europe, profits from manufacturing diesel are the highest since March 2020, while prices for propane and low sulfur fuel oil hit their highest level since 2014.

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Nowhere is the strength of oil clearer than in the futures curve, which traders use to bet on the health of the market. Prices nearby are trading at their highest premiums compared to those further afield in years, with December-red-December closely watched. the spreads on Brent crude and European diesel, both at their strongest since 2013. Such a model, known in industry jargon as an offset, indicates a relative scarcity of supply.

These signs of strength in the futures market reflect what most analysts see on paper – supply exceeding demand by about a million barrels per day in the fourth quarter.

Feeding problems

Certainly, the energy crisis is not necessarily a one-way bullish force for oil demand.

A deepening crisis in China and other countries with large heavy industry sectors raises the specter of declining industrial production, slower economic growth and, with it, d ” a reduction in fuel consumption.

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China has already announced that it will allow electricity prices to rise, removing price caps for energy-intensive companies. Many Wall Street banks have already lowered their economic growth forecasts for 2021 for the world’s largest oil importer.

In Europe, too, everything from zinc smelters to carbon dioxide factories has at times been forced to cut production to some extent, potentially mitigating the impact of the switch from gas to oil.

“Many energy-intensive industries have been forced to shut down or reduce their operations due to the high cost of energy,” said Toril Bosoni, head of the petroleum markets division at the International Energy Agency in a statement. interview with Bloomberg Television, reporting the risk to oil. demand.

For now, however, oil consumption is increasing. In Europe, strong mobility data is replicated in demand figures. Shipments of petroleum products to Spain last month show gasoline demand 5% higher than in 2019, while diesel demand was only 0.5% lower, according to pipeline operator Exolum. The IEA said this week that demand for gasoline has fallen only 2% from pre-pandemic levels globally.

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Even aviation is showing signs of life. Air traffic in Europe has returned to three quarters of its normal level, compared to around half in June. Companies from United Airlines Holdings Inc. to EasyJet Plc have increased capacity after the United States eased travel rules and the European vaccination program reduced cases.

The increased demand due to the switch from gas to oil is also manifested in the physical market, where barrels of real oil are bought and sold.

Sokol’s oil, a diesel-rich grade from eastern Russia, is trading at its highest in 21 months. In the North Sea market which is helping set the global benchmark price for crude, differentials have tightened over the past week, with traders citing rising demand from European refiners and lower loadings of goods. in November.

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With the recovery now becoming widespread, refiners Repsol SA, OMV AG and Royal Dutch Shell Plc all posted stronger margins in the third quarter, strengthening their incentive to produce more crude.

Sliding stocks

This in turn helps reduce crude stocks. The Kayrros tracking satellite says global stocks of crude, including onshore, oil in transit and floating storage are below pre-pandemic levels. While U.S. crude inventories rose last week, those at the main storage center in Cushing, Oklahoma fell the most since June, triggering a volatile week of derivatives trading.

Even with prices hovering around $ 85, speculators remain relatively disinterested in oil, rather obsessed with gas markets, consultant Energy Aspects Ltd. said this week. The duration of the speculation is about $ 35 billion less than it was when Brent last hit that level in 2018, he said, meaning that unlike that, a steep drop pricing doesn’t seem to be the order of the day anytime soon.

“In a context of low global inventories, stronger refining margins and the gradual erosion of spare capacity, only a decline in demand can dampen crude prices during the winter,” the analysts wrote. from consultant Amrita Sen and Kit Haines in a note to clients.

© 2021 Bloomberg LP

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