October 06, 2022

Crude oil and refining: Quarter three performance

World oil markets weakened through quarter three as the deteriorating economic climate placed a greater burden on demand.  Supply side pressure initially feared following the conflict in Eastern Europe was less apparent and world oil production returned to pre-pandemic volumes by August.  The risk premium applied to crude oil prices in the opening quarter of the year was cleared, with prices dropping more than 25 percent to settle below US$90 per barrel into September.  Robust gasoline demand lengthened naphtha supply ahead of subdued petrochemical demand offering highly cost competitive feedstocks as negative crack spreads widened.  Cost competitiveness of lighter feedstocks extracted from gas processing deteriorated as critically tight European gas markets spurred renewed escalation of global gas prices.

A deteriorating economic climate weighed heavily on global demand through the first half of 2022, stalling the recovery achieved consistently through 2021.  The zero COVID policy in China required repeated restrictions that periodically heavily disrupted demand of the leading global importer.  World demand for crude oil settled close to 2019 volumes, estimated at 98.63 million barrels per day in quarter two as annual growth rates slowed towards three percent.  Robust kerosene demand provided the foundation for continued growth in oil demand in Western markets, with annual growth rates exceeding 20 percent as international aviation resumed.  Demand for automotive fuels was more price sensitive, with high pump prices curtailing gasoline demand in the United States and Diesel demand in Europe.  A 40 percent slump in kerosine demand and a 12 percent drop in gasoline demand headed a two percent drop in oil demand in China.  Industrial demand was less exposed to COVID-19 restrictions and a 10 percent rise in diesel demand largely offset slowing gasoline demand.

Global oil markets weakened into quarter three, with the lengthening conflict in Eastern Europe proving a greater burden on world demand and less so on supply.  World crude oil supplies stagnated in the second quarter, with a growing boycott of Russian crude oil capping world supplies below 100 mmbpd.  A ten percent cut to Russian crude oil supply was reversed by July as heavy discounts swiftly opened new markets.  World oil production returned to pre-pandemic volumes approaching 101.5 mmbpd by August as annual growth rates remained near six percent.  Weakening global oil markets spurred OPEC to cut production quotas for the first time in 22 months from October, reversing the latest 0.1mmbpd increase implemented in August.  OPEC share of world supply has grown by around one percent since January to approach 30 percent.

Weakening markets heavily depressed crude oil prices throughout quarter three as faltering demand briskly cleared the risk premium applied in March following the shock of the deepening conflict in Eastern Europe.  Average Brent crude oil prices peaked near US$124 per barrel in June and tumbled 20 percent to average US$100 per barrel in August.  A similar rate of decline was maintained into September as prices dropped below US$90 per barrel for the first time since January.  The downturn in oil prices was the steepest since the COVID‑19 pandemic abruptly plunged global markets into a sharp recession in the second quarter of 2020.

Weakening crude oil values upstream depressed the cost of petrochemical feedstocks sourced from the refinery.  Naphtha prices dropped ten percent ahead of crude oil, moving crack spreads further into negative territory as robust gasoline demand lengthened supply ahead of subdued petrochemical demand.  Cost competitiveness of lighter feedstocks extracted from gas processing deteriorated as critically tight gas markets in Europe spurred renewed escalation of global gas prices.  Ethane prices in the United States remain at a ten year high.  Propane prices strengthened relative to naphtha, closing the cost advantage often offered on propane through the summer season.  Crack spreads on gasoline and diesel have eased but remain elevated, offering lucrative refinery margins.

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Quarterly Business Analysis: Global - Petrochemicals, Polymers and C1 Chemicals - Q3 2022

Quarterly Business Analysis: Middle East - Q3

The Quarterly Business Analysis provides key insight into production economics for a broad range of commodity petrochemicals, polymers and C1 chemicals.  The analysis presents a review of costs, prices and margins for typical production assets, providing a valuable view of regional and value chain competitiveness and is is available for each key price setting region - Asia Pacific, Middle East, Western Europe and the United States.  A quarterly report provides insightful commentary to illustrate current trends, related to recent market developments.  The accompanying database is updated monthly.


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