Oil Prices Surge on Record Demand and Tightening Supply

Strategic Insights -

Strong global oil demand, particularly in the US and China, has pushed prices up, with WTI touching $36/bl last week. The fundamental drivers of this market movement are clear: record demand, tight supply, and prohibitively expensive shipping. The global oil demand hit a record 80.3mn b/d in the fourth quarter of last year, while US stocks are alarmingly low against the backdrop of surging winter demand. This has led to a significant premium for prompt oil, causing prices to spike.

Key Takeaways:

  • Global oil demand reached a record 80.3mn b/d in the fourth quarter of last year, driving up prices and tightening supply.
  • US crude stocks are at critically low levels, prompting concerns that refiners may be forced to cut production.
  • The global freight market is experiencing its highest rates in 30 years, making shipping more expensive and further tightening supply.
  • The strong US demand for gasoline has benefited European refiners, who have enjoyed good margins on gasoline exports.
  • The mild weather in Germany has not led to the usual winter demand surge for gasoil, highlighting regional differences in demand patterns.
  • The large premium for prompt oil has been driven by the long position of hedge funds, who are steering clear of the weak dollar.
  • The shift in demand towards light products, such as naphtha and gasoline, has led to a surge in prices and profits for refiners, particularly in the US and Asia-Pacific.
  • The shortage of middle distillates and heavy fuel has stretched refiners, who are struggling to meet heating oil demand in the US.
  • The interest in light products has driven up demand for sweet North Sea crudes, with Brent cargoes loading until mid-February being fixed on VLCCs to the US Gulf.
  • The expensive shipping market has led to a discount for fuel oil-rich medium and heavy sweet grades, making them uncompetitive in the Asian market.

Statistics:

  • Global oil demand: 80.3mn b/d in the fourth quarter of last year.
  • US crude stocks: At critically low levels.
  • Global freight market rates: At record highs, not seen in 30 years.
  • Premium for prompt oil: Significant, driving up prices.
  • Gasoline exports: 1.5mn t due to move transatlantic, with a return of some $8/bl on gasoline.
  • Discount for fuel oil-rich grades: $1.40/bl since December, due to expensive shipping.
  • Winter demand surge for gasoil: Not seen in Germany due to mild weather.

Sources:

  • Record demand: Total world oil demand ran at a record 80.3mn b/d in the fourth quarter of last year (see p20).
  • Tight supply: VLCC rates from the Mideast Gulf have not been higher in 30 years (see p3).
  • Expensive shipping: West African VLCC rates are also at record highs (see p3).
  • Low US stocks: US stocks are alarmingly low against the backdrop of surging winter demand (see text).
  • Premium for prompt oil: The large premium for prompt oil has been driven by the long position of hedge funds (see text).
  • Demand for light products: The shift in demand towards light products has led to a surge in prices and profits for refiners (see text).
  • Regional differences in demand patterns: The mild weather in Germany has not led to the usual winter demand surge for gasoil (see text).