Oil prices fall on stock build and demand concerns

"Oil prices have mostly retreated today after the EIA reported that US Crude inventories expanded to an all-time high.

In the last weeks, oil prices have rallied on the back of supply curtailments that have largely brought global crude inventories under control, but prices are once again under pressure as concerns over the pace of the demand recovery intensified.

Stocks of refined products, notably diesel, are rising at an unsustainable pace. In an effort to reduce the glut in jet fuel and gasoline, refiners have traded one set of problems for another. With the colossal drop in aviation activity and road fuel demand, refiners, notably in the US and Europe, rushed to set their refineries into “maximum diesel mode” by blending jet fuel into diesel and shifting between 10-15% of gasoline yields to diesel. This has caused the overall diesel yields to increase to record levels even despite the lower refinery utilisation.

Going forward, we expect that refiners will reduce diesel yields in favour of gasoline production as lockdown measures ease. In addition, they will use workarounds to blend more jet fuel into the gasoline pool, instead of the diesel pool, further decreasing the overall diesel yields. However, this won’t be enough to keep at check diesel stocks. With refining margins under pressure and limited available working capacity for distillate products, refineries are likely to restrict crude processing and kill two birds with one stone: control distillate stocks and help margins to recover. This will lift lower crude prices.

For now, as we are in the transition period in demand-supply balances, moving from oversupply to deficits, we may get some surprises from how stocks develop, although we see consecutive draws in coming weeks. Higher stocks will always be a bearish factor. But there is a larger ‘what if’ that traders have started pricing in. And that is the possibility of demand not coming back as quickly as hoped for. That’s because of more industrial caution and changed patterns of work, but also because of the realistic scenario of a second wave of the Covid-19 pandemic and all the consequences that will bring for demand and operations.

One last thing on US stocks, don’t forget that the higher price levels that we experienced lately have motivated producers to restart some of their shut-down production, in effect reversing a bit the positive price effect that lower production had created. How prices develop further will depend a lot from how much and how quickly this shut production will come back to business. Producers see the larger picture and they want prices to remain high, but what’s the point if they have limited or no income from this as their production is shut?"

Read the article online at: https://www.oilfieldtechnology.com/special-reports/11062020/oil-prices-fall-on-stock-build-and-demand-concerns/