Oil prices today are experiencing a lift on positive demand outlooks released by OPEC and IEA, which both came out with a similar consensus that oil demand will average 96.4 million bpd in 2021, a bullish tune for traders who have pushed Brent front-month contracts towards $69 per barrel. The IEA, in particular, warned that demand will outpace supply, a risk that Rystad Energy also sees as a real possibility, especially as vaccination campaigns allow for more sustained economic reopenings. However, given the demand dent in India as well as the potential impact of the Colonial closing on US refinery runs, we believe 2021 oil demand will likely average 94.6 million bpd.
The positive demand outlook sentiment adds to the upside risk to prices that the Colonial pipeline closing still poses on the oil market. The cyber-attack on arguably the most important piece of onshore oil transport infrastructure in the US is still not resolved. The so-far six-day hiatus of the Colonial pipeline first inspired some upward movements in both crude and refined products, but if service is restored by the end of the week, then a week offline is presumably a loss of about 2.5 million barrels per day (bpd) of gasoline, diesel and jet fuel flows to the East Coast.
The attack on the Colonial pipeline is creating short-term arbitrage opportunities that didn’t exist a week ago, but also shaking awake a broader concern on energy security in general. In this case, money is the apparent motive, and the attack didn’t require explosives or drones. The fallout includes temporary retail fuel shortages in the US South East, a temporary spike in clean product tanker rates as refiners on the USGC seek floating storage options to avoid undesired run cuts amid booming US transportation demand, and potentially more gasoline cargoes sourced from the other side of the Atlantic Basin.
The US government is confident that a supply crunch can be avoided by providing refined oil products to regions affected by the pipeline closing either by truck or vessel, but both pose their own logistical challenges. Shipping oil by vessel from the Gulf Coast to the Southeast and Northeast is not only expensive and takes longer, but there also isn’t a large flotilla of tankers ready on such short notice. There could be a similar constraint on the transport of oil products by road – the Covid-19 crisis resulted in many oil-truck drivers losing their jobs, so there could be a shortage of qualified labor to deliver gasoline to places like Georgia, North Carolina, and Tennessee.
If the bottlenecks cannot be solved domestically, then the US will need to turn to Europe for imports, though a turnaround of at least 1 week makes this a risky play, especially given the increase in freight prices, as well as uncertainty of when the crisis will be resolved.
There is already evidence of panic buying, especially for gasoline, for which the average retail price in the US has soared above $3 per gallon, a nearly 7-year high.
Already, we are seeing increased rates for both tankers and floating storage in the USGC as refineries do their best to keep the flow of oil going and avoid cutting run rates. We see downside risk to our US runs forecast of 15.4 million bpd for May, as several USGC refiners have mulled run reductions, which would dent crude oil demand and possibly be another road bump along the overall bullish trajectory our balances show for this summer.
Even if the Colonial pipeline saga creates short-term chaos in the US domestic market, both on the demand and supply side, there is still upside for crude prices, especially for the third quarter of this year, where we see draws of up to 2.4 million bpd in August 2021 on account of high seasonality and progress on the Covid-19 vaccine front.
The short-term demand woes, both in India and in a greater global context, again present a complicated picture for OPEC+ to decrypt at their next meeting, scheduled for 1 June 2021, at which they could already provide guidance on plans for August supply loosening. At this meeting, we expect clues on whether our forecasted 2.4 million bpd implied crude stock draw for Aug-21 will be mitigated by any further supply loosening post-July from the alliance.
