Global oil prices are on a downward trend as sluggish demand from refineries and a rise in crude supplies put downward pressure on the market. This trend could lead to further declines in benchmark crude futures.
The weakening demand is attributed to a combination of factors, including high inflation and interest rates that are squeezing consumer spending and industrial activity, particularly in Europe. This comes at a time when global crude oil supply is on the rise, driven by increased output from non-OPEC producers like the United States.
Refinery Blues
Oil refineries, which process crude oil into fuels like gasoline and diesel, are experiencing lower-than-expected demand for their products. This is despite an increase in refinery capacity following the completion of spring maintenance.
“The rise in refinery capacity hasn’t been matched by a corresponding rise in demand,” said Saxo Bank analyst Ole Hansen. “Consumers are feeling the pinch from high inflation and interest rates, further exacerbated by trade wars and a challenging geopolitical environment.”
The North Sea Brent benchmark, which underpins pricing for two-thirds of the world’s oil, is particularly affected by the weak demand. The price differential of North Sea Forties crude, a key component of the Brent blend, plunged to a discount of 97 cents to dated Brent on May 14th. This is the widest discount since January 2023, according to data from S&P Global Commodity Insights.
Ample Supply Woes
Adding to the downward pressure is a global increase in the supply of light, low-sulphur crudes that compete with North Sea crudes. These crudes, primarily from West Africa and the United States, are becoming more abundant.
The structure of short-term Brent swaps also reflects the current market conditions. Brent for prompt delivery is trading at a discount of $1.07 per barrel to the July contract, compared to a premium of $1.64 a month ago. This pricing structure, known as contango, indicates an oversupply of crude in the near term and weak demand.
The softening trend is evident across major oil markets. In the United States, despite the conclusion of the maintenance season, refinery processing rates haven’t returned to regular seasonal levels. This has caused a decline in prices for Louisiana Light Sweet crude, which fell to a three-week low of $2.33 per barrel over WTI on May 16th.
Refinery profit margins around the world have also been negatively impacted, partly due to a global slump in diesel prices. Lower margins have prompted Asian refiners to reduce crude processing in May, with further cuts anticipated in the coming months. This further weakens overall crude demand.
Global Impact
The weakening demand for crude oil is rippling through the global oil market. Weaker Asian refining demand has caused a drop-off in Middle East crude prices, with Benchmark Dubai touching a near two-month low of $81.24 a barrel on May 8th. It has also led to a glut of Nigerian supply, forcing sellers to cut prices for May cargoes to clear excess inventory. Nigerian Qua Iboe crude fell to $2.10 above dated Brent on May 15th, the lowest premium since February according to LSEG data.
An anonymous Asian crude buyer is holding off on purchases of West African and WTI crude, anticipating further price drops. “They need to find outlets,” the buyer said. “There’s too much oil.”
The current market conditions are likely to influence the upcoming OPEC+ meeting on June 1st. Analysts expect the group to maintain its production curbs in response to the weakening demand and ample supply.
The situation in Asia, the world’s final leg in the refining process, is particularly concerning. According to U.S. oil analyst Paul Sankey, Asia is typically the first to cut back when markets are oversupplied. He expects OPEC to roll over its production cuts at the upcoming meeting.
Source: Reuters
