Oil price at 3-year high as fuel switching supports price rally

Muscat: The global crude oil price rally gathered momentum in October-2021 as oil regained the $80 per barrel mark for the first time in three years and traded a little short of an 8-year high level, a new report reveals.

Brent near-term futures traded comfortably above the market and traded at 3-year levels of $85 per barrel by the second week of October-2021.

The rally was supported by higher demand as the economic recovery picks pace, the Kuwait-based investment strategy and research firm Kamco Invest said in its Oil Market Monthly Report.

“In addition, the record-high gas prices in several parts of the world and a shortage of coal have prompted electricity generation companies to switch to crude-based fuel for generation, which further supported prices,” the report said.

Substitutes like diesel and fuel oil are seeing increasing demand, especially in the Asian market, which led to a shortage in Europe.

A report from FGE said that global stockpiles of key oil products such as diesel and gasoline have dropped to the lowest since 2014. The IEA added that the spillover from gas to the oil market could boost oil demand by 0.5 million barrels per day (mb/d) over the next six months. Moreover, the arrival of the winter season in the northern hemisphere in a month and the potential for colder-than-usual temperatures has led to an increase in the storage of gas and heating oil.

On the other hand, supply remained under check as the Organisation of Petroleum Exporting Countries (Opec) reported only a marginal increase in production while US producers also showed restraint with only modest growth in output.

The Kamco analysis shows that oil demand is yet to fully peak as some segments of consumption, for instance, industrial fuels and jet fuel, are yet to reach pre-COVID-19 levels.

This was reiterated in EIA’s latest Short Term Energy Outlook which showed US fuel demand at 19.96 mb/d in September-2021, below the pre-pandemic level of 20.25 mb/d in September-2019 while jet fuel demand stood at 88 per cent of September-2019 levels.
Opec remained cautiously optimistic about growth in oil demand in the near term.

In its latest monthly report, the agency said that although a gas-to-oil switch would mean higher demand for crude oil, it could affect demand elsewhere, such as refining. While lowering the 2021 demand growth expectation from 5.96 mb/d to 5.8 mb/d, Opec advised producers to keep a close eye on oil fundamentals. According to the report, oil demand was lower-than-expected during the nine months of 2021 and that more than offset upward revision for demand in the fourth quarter of 2021.

The rally was supported by higher demand as the economic recovery picks pace, and the gains were mainly led by expectations of higher ongoing demand in the near-term coupled with additional demand for diesel and fuel oil from the gas-to-oil switch as a substitute fuel for electricity generation in Europe and Asian markets, Kamco said in its report.

Some analysts are now predicting oil to reach $100 per barrel, although Opec maintained a cautious view on the market pointing to offset forces in the end market. The median consensus of Brent crude prices now stands at $73 per barrel for the fourth quarter of 2021, according to Bloomberg and is expected to remain above $70 per barrel over the next three quarters. The EIA also raised its Brent crude price forecast by $2.8 per barrel to an average of $71.38 per barrel in 2021 and by $5.87 per barrel to $71.91 per barrel for 2022.

Meanwhile, after seeing a decline in August-2021, Opec crude monthly average recorded a month-on-month (m-o-m) increase of 5.0 per cent and averaged at a three-year high average of $73.9 per barrel in September-2021. Brent crude averaged at $74.4 per barrel, recording a slightly higher m-o-m growth of 5.1 per cent while Kuwait crude grade was up 5.4 per cent during the month to average at $74.9 per barrel.

World oil demand
The Opec has also lowered its estimate for world oil demand growth for 2021 by 140 thousand barrels per day (tb/d) to 5.8 mb/d and total yearly demand is now expected to reach 96.6 mb/d. The revision reflected lower-than-expected demand during the nine months of 2021 based on actual consumption data, partially offset by a positive revision to demand data for the fourth quarter of 2021.

Opec said that the recent development could lead to higher demand for fuel oil, diesel and naphtha for electricity generation, refining and petrochemical use. However, the record-high natural gas prices have resulted in high electricity costs and as a result, refinery intakes and industrial production would be hampered, partially offsetting the upside potential.

The demand during the last quarter of the year is expected to be supported by a seasonal increase in petrochemical and heating fuel demand as well as the potential switch from natural gas to petroleum products given the record high prices of natural gas in some markets.

Oil demand growth expectations for 2022 was kept unchanged at 4.2 mb/d with demand expected to reach 100.8 mb/d. Opec expects demand to be supported by healthy economic growth in key oil-consuming countries, further supported by emergence from the Covid-19 pandemic. In terms of product categories, gasoline and diesel are expected to see strong demand growth backed by higher mobility and improving industrial activity.