Some nations’ oil consumption surging
Biggest guzzlers see demand eclipse pre-pandemic levels, boosting prices
Some of the world’s biggest economies are seeing oil consumption turn the corner and even surpass pre-pandemic levels as falling COVID-19 infection rates drive a recovery in activity.
Oil demand in China, the world’s top energy consumer, will be 13 percent higher next quarter than in the same period in 2019 before the pandemic, according to SIA Energy.
Indian fuel sales extended a rebound last month, while American consumption of petroleum products just hit a record high. Europe has also just had its best August for gasoline demand in 10 years, IHS Markit said.
The improvement in consumption across major economies has been buoying oil prices that have rallied around 40 percent this year.
But oil fell by the most in nearly three weeks Thursday after China decided to tap its crude reserves to ease a surge in energy costs.
Futures declined 1.7 percent Thursday in New York, following the latest step by the world’s largest importer of raw materials to quell a commodities rally. Oil prices briefly rose earlier in the session after a U.S. government report showed crude stockpiles fell as production tumbled the most on record last week due to disruptions by Hurricane Ida.
“Additional supply coming from the Chinese SPR — reducing the need to import more oil in the near term — has weighed on prices,” said Giovanni Staunovo, a commodity analyst at UBS.
In recent days, U.S. benchmark crude has fluctuated near $69 a barrel, with investors weighing the impact of domestic supply disruptions against uncertainty over demand as the pandemic continues to rage.
The OPEC+ alliance decided to keep restoring crude supply earlier this month, citing tighter balances into year-end.
“The worst for Asian fuel demand is over and we see a soft re
covery of oil demand in the coming months,” said Sengyick Tee, an analyst at Beijing-based SIA. China’s overall oil consumption will be led by a more than 20 percent jump in gasoline use next quarter from 2019, he said.
While motor fuel is powering the recovery as people take to the roads after months of lockdown, the situation for other oil products isn’t as positive. Jet fuel consumption is still languishing because of the lack of international air travel. Indian diesel use is down due to seasonal factors, although SIA Energy sees demand for the fuel in China rising 4 percent next quarter from 2019.
Trucking and construction activities typically decline in India from June to September because of the monsoon season. That weighs on demand for diesel, the country’s most popular fuel, before it rises again toward the end of the year amid crop harvesting and festivals.
“Sales volume of petrol has already crossed pre-COVID levels, with diesel likely to reach there in the next two to three months” said Shrikant Madhav Vaidya, chairman of Indian Oil, the country’s biggest refiner.
Indian processors will have “limited upside potential” for run rate increases this month as they struggle to cope with excess diesel that’s been produced from the process of making gasoline, said Senthil Kumaran, head of South Asia oil at industry consultant FGE. A turning point may come around October, with runs potentially rising above 5 million barrels a day by year-end, he said.
Chinese run rates have inched up with state-owned Sinopec refining the most crude in 11 months in August, data from local consultancy SCI99 show. However, activity at private refiners in Shandong province is only just over 70 percent amid a government-led clampdown on the sector.
Still, with some of Asia’s largest economies reporting tens of thousands of virus infections per day, some threats to energy demand remain even as the region races to vaccinate its people.
“Resurgence risk is a concern that we have built into our outlook, particularly for populous countries such as India and Indonesia,” said Qiaoling Chen, an analyst at energy consultancy firm Wood Mackenzie. “For now, the worst for Asia oil demand is over, but the downside risks remain.”
China’s move to release oil from its strategic reserves, its most dramatic intervention yet in the oil market, primarily targets domestic refining and chemical firms. It follows similar action the government has already taken in several other commodities markets and adds pressure to oil prices.
In a late statement Thursday, the National Food and Strategic Reserves Administration said the country had tapped its giant oil reserves to “to ease the pressure of rising raw material prices.”
A sustained decline in prices demonstrates the market thinks China will keep using their strategic reserves to drive prices down, according to Phil Flynn, senior market analyst at Price Futures Group.
As of Thursday, nearly threefourths of U.S. Gulf oil output was still offline after Hurricane Ida hit Louisiana, marking a slower comeback than in the wake of Katrina in 2005. The ripple effects in the market were apparent in a report from the U.S. Energy Information Administration. Gasoline stockpiles fell by more than 7 million barrels last week, while crude production slid by 1.5 million barrels a day. Crude inventories dropped 1.53 million barrels.
Physical markets have reacted to the Gulf outages with a surge in the value of grades from U.S. Mars Blend to Russia’s Urals. Royal Dutch Shell declared force majeure on “numerous contracts” following hurricane-related disruptions, the company said. One of those contracts included a 2million-barrel cargo of Mars crude sold to China, according to people with knowledge of the matter.