Oil market faces capacity shortfall: Vitol

The global oil market has been tightened by a capacity crunch, both upstream and downstream, and is unlikely to loosen much "until we see some abatement in demand", trading firm Vitol's chief executive Russell Hardy told the Bloomberg Qatar Economic Forum today.

"We're faced with underinvestment and decline in production capacity for crude oil, and at the same time we have a relatively tight refinery situation," he said, pointing to refinery shutdowns during the Covid-19 pandemic. "Relatively low" oil product stocks have helped push up gasoline, diesel and jet fuel prices, he said.

European refining margins are exceptionally high at the moment — 10ppm diesel cargoes hit a fresh all-time record of $63.85/bl above the North Sea Dated crude benchmark on 20 June. Eurobob oxy gasoline margins have cooled off from their own all-time highs of $56.90/bl on 1 June to $33.63/bl on 20 June, but they still sit significantly higher than the $9/bl average in June 2021.

"The solution is more refineries, running more crude to produce more products," Hardy said, adding that global demand for gasoline and jet fuel has yet to recover to the pre-pandemic levels of 2019. "There's still 2mn-3mn b/d of demand to come back next year", Hardy said. This is "fairly supportive of prices and just means we've got to keep a little bit of focus on the supply side".

Hardy's forecast for oil demand growth is broadly in line with the IEA's projection for a 2.2mn b/d increase in 2023, although the latter does expect the squeeze on downstream capacity to ease over the next 18 months. After falling for the first time in 30 years in 2021, the IEA forecasts that global refining capacity will rise by 1mn b/d this year and a further 1.6mn b/d in 2023. "This is a result of 4.1mn b/d of new capacity coming online, offset by 1.6mn b/d of permanent shutdowns," the IEA said in its most recent Oil Market Report.

The refinery closures are skewed towards this year, with 1.1mn b/d of capacity expected to shut in 2022. "Still, the pace of capacity shutdowns is slowing somewhat, compared to 1.8mn b/d in 2021," the IEA said, adding that 70pc of the net refining capacity growth in 2022-23 will come from east of the Suez Canal, primarily China and the Middle East.

Hardy said a rebound in Chinese refining activity would help alleviate the tightness in the market in the near term. "A lot of capacity has been underutilised in China, because they've had their recent problems with Covid," he said. "If China started exporting a little more product, we wouldn't feel quite the tightness that we feel today."

Government data show Chinese refinery runs fell by 10.6pc on the year to 12.7mn b/d in May.

Trade shifts

The oil markets were already "pretty tight" before the war in Ukraine started, Hardy said. Tough sanctions on Moscow and customers boycotting Russian oil have since exacerbated the problem, although trading patterns are recalibrating. Hardy estimates that roughly half of Russian oil exports are heading east at the moment, and he expects that share to grow as the EU's embargo comes into effect.

"As we go into 2023, we're going to see the [Russian] crude oil and products go predominantly to Asia," Hardy said. "Things will shift, will change direction. Europe is going to have to import diesel from other areas, from countries in the Middle East."

Shipping such large quantities of oil to Asia will be a logistical challenge, Hardy noted, "but people are putting all those mechanisms in place in order to be able to ship the oil, and they have found willing buyers in India and China who have growing markets and a need for that crude oil", he said.

By Ruxandra Iordache