OPEC FEATURE ARTICLE, Released 8/12/2021, Source: August 2021 MOMR
CRUDE AND PRODUCT PRICE MOVEMENTS
The global oil market has seen a significant improvement in its fundamentals this year, translating into lower crude oil price volatility compared with 2020. The pick-up in oil demand, coupled with a large drop in oil inventories and reduced uncertainty in the market, has caused crude and oil product prices to rebound strongly, surpassing levels reached before the onset of the COVID-19 pandemic. The ICE Brent and NYME WTI futures contracts rose steadily over the past several months, up by $24.1 and $25.4, or 48% and 54%, respectively, between December 2020 and July 2021. Oil prices were supported by much improved economic conditions, with firm equity markets and large economic stimulus packages, as well as a gradual rise in oil demand and the anticipation of a further recovery amid optimism about accelerated vaccination rollouts in most major economies. Market confidence has also improved as OPEC and participating non-OPEC countries in the Declaration of Cooperation (DoC) maintained strong conformity levels in their voluntary production adjustments. However, the most current resurgence of new COVID-19 variants in several regions has impacted oil prices in recent days.
In terms of market structure, the backwardation of major crude benchmarks had strengthened since early 2021, mirroring stronger market fundamentals. The ICE Brent and NYMEX WTI M1-M3 spread both widened again in July to a backwardation of about $1.5/b, on expectations of a market deficit in 2H21. The transatlantic spread between ICE Brent and NYMEX WTI tightened in 2Q21 and continued to narrow in July, to settle at $1.86/b. WTI futures performed better than ICE Brent, as the rebalancing process in the US accelerated, amid robust oil demand and strong economic growth in that country, slow growth in oil supply and a large decline in crude stocks.
On the product side, fuel prices showed a substantial recovery this year in response to stronger crude prices. Moreover, the lifting of restrictions and subsequent improvement in fuel consumption levels helped ease the product surplus seen in 2020. In addition, the seasonal uptick in personal transport mobility activity in summer provided further support.
At the top of the barrel, gasoline production in the US in 1H21 was affected by the arctic freeze, the Colonial pipeline shutdown, spring floods and the turnaround season. As a result, US gasoline supplies suffered a considerable contraction, which led to sharp downward pressure on inventory levels and pushed gasoline prices to skyrocket back to pre-COVID levels. This gasoline shortage in the US opened up export opportunities and helped gasoline prices, to a more limited extent, in other regions as well. At the middle of the barrel, global gasoil prices remained sustained, supported by healthy economic activity, although jet/kerosene prices in Asia and in Europe lagged, due to the weak recovery in international and business air travel. High sulphur fuel oil (HSFO) prices in all regions rose, although volume availability surged in the US and Asia amid weak demand. In July, stronger LNG prices, robust power demand and hot weather all point to a boost in HSFO consumption and crack spreads.
Looking forward, refined product prices in 2H21 are likely to continue benefiting from a seasonal strength in transport fuels, although current high refinery run rates could dampen some of the upside in the immediate near term. Moreover, changes in crude prices, as well as a potential decline in fuel output over the peak autumn maintenance season, particularly around September, could lead to additional product price volatility. Meanwhile, unplanned outages, especially weather-related supply disruptions due to a forecast heavy hurricane season in the US, and concerns over possible renewed lockdowns, may also add to the volatility. Amid this precarious outlook, the vigilance and determined efforts by the countries participating in the DoC will remain ever more important in striving to maintain a stable and balanced market.
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