The monthly report of the International Energy Agency is often a dry yet data-filled and important summary of the global oil market.
But its May report, released Thursday, is more stark in its wording as it projects an oil market in the coming months that will continue to be battered by tight supplies due to the formal and informal embargoes facing Russian oil, inventories at low levels not seen for years and a market for products, particularly distillates like diesel, that will continue to remain stronger than that of the crude needed to make them.
In some ways, the IEA report suggests that what has happened so far might be a calm before the storm. “Despite mounting international pressure and falling oil production, Russian exports have so far held up by and large,” the report said.
But it notes that this Sunday is an EU deadline for major trading houses to stop dealing with Russian oil companies such as Rosneft and Gazprom. The loss in Russian output in April was about 1 million barrels per day, the IEA said. That could be up to 3 million barrels per day by the end of the year. (That 3 million barrels-per-day figure is not new; the IEA has said that previously.)
It is the IEA’s focus on the products market that is written in a style more foreboding than one normally finds in the agency’s monthly report. That isn’t surprising given how product markets, particularly distillates such as diesel, have roared ahead of advances in the price of crude.
“Limited spare capacity in the global refining system, together with reduced exports of Russian fuel oil, diesel and naphtha have aggravated the tightness in product markets, which have now seen seven consecutive quarters of stock draws,” the report said. And while releases from the U.S. Strategic Petroleum Reserve and other nations’ reserves have slowed the decline in overall global stocks, they haven’t yet shown up as products such as gasoline or diesel.
Data cited by the IEA helps explain some of the tightness. The agency said global refinery throughput in April was 78 million barrels per day, the lowest in roughly a year, though it adds that most of the decline came out of locked-down China, where demand has been down as well due to its zero-COVID policy.
But the IEA also describes April U.S. refinery operations as “underwhelming, with operational issues and tight available capacity, leading to a counter-seasonal monthly fall.”
The most recent Energy Information Administration refinery figures show U.S. refinery utilization in May coming in at 90%, less than three of the four weeks in “underwhelming” April.
Forecasts for the second half of the year do see increases in refining operations, driven by high refining margins that incentivize processing. “We expect a strong ramp-up in refining activity to fill the product supply gap,” the IEA said, predicting that global throughput at refineries will rise 4.7 million barrels per day by August from the April levels, “helping restock depleted product inventories in 3Q22 for the first time in two years.”
Increased output from the U.S. will be one of the areas contributing to that, the IEA said.
U.S. refinery throughput is expected to be 680,000 barrels per day more in the third quarter compared to the first, but the country is also consuming more product in the third quarter anyway. That number also assumes “record-high utilization rates.”
“But the ability of plants to resist operational stress and the hurricane season at the end of summer may yet affect our forecast,” the agency said of the upcoming months when it also sees no demand declines, just slowdowns in growth, and low inventories coming into the heavy demand of the summer.
Surveying the push/pull of import and exports markets, the IEA noted the key relationship now is the price relationships among U.S., Europe and Latin American prices. Recent weekly data from the EIA shows that exports of all distillate products, including diesel, have been running significantly above historic norms, often cited as a key reason why East Coast diesel prices in particular have soared relative to the key Gulf Coast market.
The IEA finds it is the Latin American market that has been key. Gulf Coast diesel prices have been above Europe, even though it has been European markets — starved of a chunk of Russian supply — that have been the driver of higher diesel prices globally. The growing parity between European and U.S. diesel prices, the IEA said, reflects “the strength of the pull from Latin American importers, bidding up U.S. barrels against the European contenders.”
IEA data on refining margins suggests just how much more refineries are making these days. Its model of the margin on processing a combination of two U.S. crudes — known as HLS and LLS — in a Gulf Coast refinery in April gave a yield of $36.25 per barrel. In January, it was $15.17 per barrel.
Processing Brent in a refinery in Europe yielded $14.30 per barrel in April. In January, it was $1.29/b.
Although demand destruction did lead the IEA to trim its forecasts of future growth, the reality is that it still sees global oil demand rising by 3.6 million barrels per day from an April low through August. That would be in a market where the agency suggests Russian output declines will total 3 million barrels per day.
That led to this word of caution: “If refiners cannot keep pace, product markets and consumers could come under additional strain.”