Column: Oil market rebalancing largely complete, except for jet fuel

Market rebalancing has been completed earlier than seemed likely a few months ago, as a result of a strong recovery in manufacturing, progress with vaccinations, hurricane disruptions to crude production, and extra output cuts by OPEC+.

With the exception of jet, most other indicators of production, consumption, and inventories should return to normal by the end of the first quarter, rather than the end of the second, as seemed likely last autumn.

The volume of petroleum products supplied to domestic customers excluding jet has climbed above the five-year average for the first time since the onset of COVID-19 in the United States in March 2020.

The volume of products supplied excluding jet in the four weeks ending Feb. 12 was 18.7 million barrels per day (bpd), which was 0.6% above the seasonal average for 2016-2020.

(Chartbook: tmsnrt.rs/3s7q1yJ)

STOCKS NORMALISE

Excess inventories of crude and products accumulated during the second quarter of last year in the first wave of the pandemic and the volume war between Saudi Arabia and Russia have been largely absorbed.

Total crude and products stocks outside the strategic petroleum reserve declined in 26 out of the last 33 weeks by a total of 153 million barrels, data from the U.S. Energy Information Administration showed.

The draw down has reversed most of the 194 million barrel build between the middle of March and end of the second quarter last year (“Weekly petroleum status report”, EIA, Feb. 18).

Stocks outside the strategic petroleum reserve stood at 1,301 million barrels last week, not significantly higher than 1,287 million barrels at the same point in 2020 and 1,258 in 2019.

Stocks are less than 1.5% above the previous five-year average; even that overstates the surplus because inventories have been rising around 2.75% per year in recent years.

Relative to the previous five-year average, surplus inventories are in the 40th percentile, down from the 92nd percentile last July, indicating stocks are somewhat tight.

Crude and gasoline stocks are exactly in line with the 2016-2020 five-year average, while distillate stocks are in a small surplus of 5%.

These estimates do not change much if comparisons are made with the pre-pandemic 2015-2019 five-year average: the surplus in crude is just 2.6%, gasoline is just 1.4%, and distillate is 6.8%.

On any measure, U.S. petroleum inventories are back within the range of normal year-to-year variability, suggesting all or nearly all of the oversupply from last year has been digested.

PRODUCTION INCREASE

Despite inventory normalisation, production of crude and refined products is running well below consumption, implying stocks will decline further over the next few months.

The volume of all petroleum products supplied to the domestic market last week was 4% above the prior five-year average while the volume of crude fed into refineries was 6% below.

The market is already signalling the imminent need for more crude production from OPEC+ and U.S. shale firms through rapidly escalating spot prices and an increasing backwardation in the futures market.

Either OPEC+ must raise its output, or prices will continue to escalate until U.S. shale firms fill the production-consumption gap.

Despite the overall rebalancing, jet fuel will remain a hole in the global market until travel restrictions to contain the novel coronavirus are eased and international passenger aviation resumes.

Global jet fuel and kerosene consumption amounted to around 8 million barrels per day out of total petroleum consumption of 98 million bpd in 2019, according to BP (“Statistical Review of World Energy”, 2020).

Until the international passenger aviation market returns to something near normal, both OPEC+ and U.S. shale producers will have to keep output below pre-pandemic levels to avoid flooding the market.

But the market is signalling crude production needs to start increasing soon, even if it remains below pre-pandemic levels throughout the rest of this year and into 2022 to offset the weakness in jet consumption.

John Kemp is a Reuters market analyst. The views expressed are his own.