Crude Oil and Refining: Quarter Two Performance
World oil markets tightened through quarter two, with a widening boycott of Russian energy streams leaving little liquidity in supply as seasonal demand for transportation fuels escalated. Market sentiment was swiftly swayed as contrasting news around both supply and demand was gathered from turbulent markets. Brent crude oil prices peaked at a ten year high approaching US$120 per barrel in March, up 60 percent from December. Contrasting views on the risk premium enhanced volatility, but prices remained above US$100 per barrel into June. Petrochemical feedstock costs eased relative to crude oil as demand lagged behind a sharp upturn in seasonal demand for transportation fuels.
Widespread relaxation of COVID-19 restrictions promoted robust growth in world demand for crude oil into quarter two. Increased mobility and revival of economic activity spurred global crude oil demand to increase 5.6 percent on the year to an estimated 99.28 million barrels per day (mmbpd) in quarter one. Recovery was centred in Western markets, with annual growth rates approaching ten percent in United States and Europe building 55 percent of incremental demand. Kerosine contributed the greatest share of oil demand growth, with revival of the aviation business propelling annual growth rates above 60 percent in Europe and 30 percent in the United States. The recovery in world oil demand lost momentum through April, with extension of the Zero COVID-19 policy in China depressing demand 5.9 percent, bringing the first drop in demand for more than two years. The lengthening conflict in Ukraine and implementation of tighter monetary policy to tackle mounting inflationary pressures weighed heavily on economic growth and consequent energy requirements in wider global markets.
Global oil markets tightened into the second quarter of 2022, with supply side pressures increasingly a bottleneck. Global oil production strengthened 6.4 percent in the year to March to peak at a two year high of 99.7 mmbpd. The deepening conflict in Ukraine heavily disrupted supply in April, with global production suffering its largest drop for 14 months as it contracted 0.8 mmbpd. A ten percent reduction to production in Russia led the downturn. Average global production of 98.7 mmbpd in April and May held production close to volumes seen in January, resisting mounting political pressure to turn up production rates as escalating prices risked stunting economic growth. OPEC production has consistently failed to deliver planned ramp up since February, with cuts in Africa holding production around 28.5 mmbpd. OPEC share of world oil supply climbed to 28.8 percent by May, largely due to displacement of Russian production.
Tightening markets and a widening risk premium led crude oil prices to escalate sharply into the second quarter of 2022. Average FOB Brent prices leapt 60 percent from December to peak at a ten year high approaching US$120 per barrel in March. The higher crude oil price point found alongside the deepening conflict in Central Europe was sustained through quarter two, with prices settling consistently above US$100 per barrel for three consecutive months into June. A lack of liquidity in global oil markets led prices to briskly follow volatile market sentiment. Average prices dropped US$14.4/bbl in April fearing demand destruction on renewed COVID-19 lockdowns in China. A greater focus on supply side pressures in May led prices to briskly rebound almost US$10/bbl on discussion of wider sanctions on Russian crude oil.
Contrasting demand for fuels and petrochemicals led petrochemical feedstock costs to detach from latest upturn in fuel values into the summer season. A busy schedule of maintenance turnarounds curtailed demand for naphtha, prompting prices to stagnate near US$900 per ton as prices for middle distillate fuels escalated. Crack spreads for naphtha fell to historic lows, with prices dropping below crude oil by the end of May. Propane offered further cost savings as prices fell to a 15 percent discount to naphtha with gas prices relaxing relative to crude oil. Refinery margins escalated to record highs as seasonal demand for fuel surged, widening crack spreads for kerosene, gasoline and diesel into June.
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