By Tom Kool
Oil prices have rallied significantly, rising $10 in two weeks as markets are increasingly convinced that global demand for crude is picking up once again.
Deep output cuts and the reopening of some of the largest economies in the world have brightened the outlook for oil, but many analysts are now beginning to question whether this rally isn’t already overdone. So why are oil prices still rocketing as analysts warn of ballooning inventories and continued weak demand for aviation fuel?
Looking at the data, the first signs of real demand recovery are coming from the Far East, where Chinese refiners have embarked on a buying spree, capitalizing on ultra-low crude prices in heavy hit markets such as Brazil, Oman, and West Africa.
Spurred by Beijing’s call to action, factories and farmers are leading the demand recovery in diesel according to Liu Yuntao, an analyst working with Energy Aspects in London.
But it’s not just diesel. Gasoline consumption is also on the rise in China, where rush hour traffic in Beijing, Shanghai, and tens of other big cities is approaching normal levels once again as the Chinese are finding out that coronavirus isn’t spread by driving your car.
Demand for jet fuel, however, continues to lag behind as air travel is still a fraction of what it was before the lockdown began. Demand for distillates such as jet fuel could continue to lag for a much longer time as long-haul air travel continues to face restrictions. The International Civil Aviation Organization (ICAO) estimates that international capacity could drop by as much as two-thirds from previous forecasts for the first three quarters of 2020.
Chinese refineries may have ramped up activity too soon. Refining margins are already suffering as Chinese refineries are exporting large amounts of oil products in the region, flooding an already well-supplied market with more gasoline, diesel and bunker fuel. Unlike China, other East-Asian countries such as Japan and South Korea are taking a more prudent approach while planning to ease lockdowns, resulting in lower fuel consumption during what is usually seen as peak driving season.
In the meantime, 117 Very Large Crude Carriers are expected to unload up to 230 million barrels of crude oil to China over the course of the next three months. Most of this crude was bought in April against rock-bottom prices. Market watchers are now keeping a close eye on refinery run rates and margins in China as one of the first main indicators of real recovery in global crude demand.
A real recovery in crude markets will only materialize if Chinese oil imports continue to stabilize during 2020.
For now, early data on fuel consumption in both the Far East and the U.S. will show whether the optimism in oil markets was justified or not.
By Tom Kool of Oilprice.com