Pandemic Jitters Halt Massive Oil Price Rebound

Copyright © 2021 Energy Intelligence Group

Oil prices recouped some of the ground they lost in August until pandemic jitters ended a massive three-day rally on Thursday. International benchmark Brent gained $4.62 per barrel to end the week at $71.07/bbl, while US price-pin West Texas Intermediate rose $3.73/bbl to close at $67.42/bbl. A tropical storm heading for the US Gulf Coast prompted energy companies to shut in offshore platforms and prepare to close refineries, which puts markets on stronger footing heading into September. Factors behind the short-lived rally included short-covering after several sessions of steep losses the week prior, approval of the Pfizer vaccine by the US Food and Drug Administration, an explosion at an oil platform in Mexico, and a weakening dollar. An uneven, volatile recovery is complicating Opec-plus efforts to manage oil markets. The producer coalition meets on Sep. 1 to decide output policy at a time when the global economic recovery has come under serious threat from rising infections due to the Covid-19 Delta variant. The group had agreed to ramp up production by 400,000 barrels per day a month from August to at least December in a bid to hold prices around the $70/bbl level. With the International Energy Agency shaving 500,000 b/d from its global demand forecast for the second half of this year, the extra supplies may overshoot expectations about demand if the Delta variant further undermines the economic outlook in coming weeks. The tropical storm brewing in the Caribbean and bearing down on the US Gulf Coast throws a wrench into US jet fuel fundamentals. US jet fuel markets were evenly balanced at 1.4 million b/d as sales receded from their post-pandemic high and refiners kept a lid on output. The summer travel season is winding down and some airlines are feeling the impact of the Delta variant, with bookings down and cancellations rising. Imports surged to 275,000 b/d and there are more cargoes on the way. At least seven vessels are due to land at West Coast ports in the second half of August. Incoming supplies replenished West Coast tanks, helping to lift overall US stocks by nearly 1.5 million barrels to 44.4 million bbl. East Coast stocks climbed by 700,000 bbl and were one-third higher than 2020 levels amid strong pipeline flows and imported supplies. US jet fuel prices continue to outperform levels in Europe and Asia, widening their lead this week with average spot prices approaching $2 per gallon. Underlying diesel futures regained all the ground they lost last week at the same time that jet spreads tightened in the major trading regions, lifting outright quotes into the $1.85-$2.01/gallon range. Differentials versus diesel futures narrowed by 2¢ to a 23¢/gallon discount on the Gulf Coast and to 17¢ below the print in New York Harbor. A 10¢ surge on the West Coast lifted Los Angeles jet differential to just 7¢ below October diesel futures, widening the arbitrage window across the Pacific. European flight departures stayed roughly stable at around 29% below pre-pandemic levels, according to network manager Eurocontrol, holding jet fuel consumption at only 50%-55% of 2019 volumes due to the lack of long-haul traffic. Trans-Atlantic flights could suffer a further blow if the European Union puts restrictions on US travelers due to the surge in Covid-19 cases. A total of five cargo deals were concluded in Europe’s price-setting market-on-close trading window over the past week. Unipec was the seller in four of those deals, offloading two parcels on Aug. 24 to Swiss trader Vitol for delivery into Rotterdam from early to mid-September. Unipec also sold a parcel on Aug. 25 to Shell, with volumes to be delivered into Rotterdam at the middle of September. Unipec sold a fourth parcel on Aug. 26 to Glencore that is due to arrive in Rotterdam from early to mid-September. The fifth parcel that traded in the window was sold by Vitol on Aug. 26 to BP, with the volumes arriving in Le Havre during the first half of next month. Asian jet markets gained modest ground as air traffic jumped in two of the region’s largest aviation markets. The benchmark Singapore spot price differential rose by a slight 2¢/bbl from a week ago to a premium of 7¢/bbl to Singapore quotes on Aug. 26. The new LR3 tanker Dimitrios was laden and recently floating off Luanda, Angola, according to data intelligence company Kpler. The tanker had loaded 40,000 tons of jet on Jul. 22 from Pengerang in southern Malaysia near trading and pricing hub Singapore, Kpler added. The arbitrage flow of jet from East of Suez to west of the canal tumbled by 158,000 tons from the previous week to 243,000 tons in the week starting Aug. 23, according to Kpler. Of those volumes, 95,000 tons loaded from Saudi Arabia, 84,000 tons loaded from Japan and 63,000 tons loaded from India, Kpler added. The cargoes are expected to arrive in Europe and the US West Coast, Hawaii or Alaska from Sep.13 through Oct. 2. Prompt jet demand was bolstered by increases in airline capacity in Asia's regional aviation markets. Scheduled airline capacity for the week of Aug. 23 jumped by 8% from the previous week in Northeast Asia and spiked by 18% in Southeast Asia, according to aviation data analysis firm OAG. Airline capacity in China recovered strongly in the week of Aug. 23, leaping by 12% from the previous week, OAG noted. But in a sign of how jet fuel burn per flight has dropped due to the pandemic, international flights made up less than 1% of all airline capacity in China, OAG added. Short-haul domestic flights burn significantly less jet than longer-haul international flights. European Quarterly Jet Fuel Swaps Quotes (Bid/Offer Range in $/ton, c.i.f. NWE) Quarter Chg. Aug 27 Aug 20 Q4'21 44.00 607.00 - 608.00 563.00 - 564.00 Q1'22 41.28 603.30 - 604.25 562.00 - 563.00 Q2'22 39.75 603.50 - 604.50 563.75 - 564.75 Q3'22 38.00 605.00 - 606.50 567.00 - 568.50 Prices are live for midday. Source: FCStone

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