After a period of stability, crude oil prices recently increased to six-month highs. On 29 March, WTI crude price surged to $66.03/b while Dated Brent hit $69.48/b on 2 April. The increase in crude oil prices was largely driven by geopolitical concerns rather than by fundamental factors as the market is adequately supplied with crude and stocks are at comfortable levels. In addition, other factors such as refinery bottlenecks and early concerns regarding summer gasoline supplies have continued to support prices.
Despite the recent surge in prices, crude oil inventory levels in the main consuming countries remain at comfortable levels. In the USA, commercial crude oil stocks stood at 333 mb at the start of this month, which corresponds to 7% above the fiveyear average. Despite having fallen to 649 mb for the week ending 6 April, product inventories still remain 1% above the five-year average. Draws on distillate and gasoline inventories are the main driver behind the fall in product stocks. Gasoline inventories have fallen for nine consecutive weeks to 200 mb or 3% below the five-year average; in terms of forward cover gasoline stocks stood above 21 days or 1 day below the same time last year. Despite the drop in product stocks, total commercial oil stocks remained 3% above the five-year average.
Overall, the drop in US gasoline stocks has followed the typical downward seasonal trend for the period when summer grades replace winter grades, although the draw began earlier than last year. Early refining maintenance and a large number of unplanned refinery outages over the first quarter of this year kept the refining utilization rate at a low level of around 86%, compared with around 91% during the corresponding quarters of 2004 and 2005. (In 2006, utilization rate was also around 86% in the first quarter, but this was due to disruptions following the hurricanes.) Unplanned partial or total shut-downs occurred in a number of refineries, such as Varlero’s McKee, Texas refinery, BP’s Whiting, Indiana refinery, and ExxonMobil’s Torrance refinery. Taken together, these planned and unplanned shutdowns — and their resulting impact on stock levels — have been the main factors behind the upward pressure on gasoline.
Lower gasoline imports to the USA have been another factor behind the tight gasoline market. US gasoline imports fell below 0.9 mb/d in the first quarter, compared to 1.1 mb/d in the same month last year, due mainly to a lack of arbitrage opportunities in the trans-Atlantic market. Moreover, the 18-day strike in the Fos-Lavera oil and gas terminal in south of France resulted in the partial shutdown of four French refineries. The strike, which ended at the beginning of this month, provided further bullish momentum in the products market.
Strong demand for gasoline was another factor in the recent stock-draws. US demand for gasoline averaged 9.1 mb/d in the first quarter, representing an increase of 0.2 mb/d over the previous year. Developments in the gasoline futures market have also played a role. With the market in backwardation, refiners have little incentive to build stocks. The forward structure also indicates that the market is not showing any concern about gasoline supplies in the months ahead.
Thus, gasoline market fundamentals appear relatively bullish over the very short term. However, the pressure on the oil market is expected to ease as refinery maintenance ends and crude runs increase. In contrast to the current tightness in the gasoline market, global crude oil fundamentals appear to be largely in balance at current OPEC production levels. Given ample crude supplies, it is clear that increasing production would only serve to build crude oil inventories and would not resolve the tightness in the downstream.
As always, non-fundamental factors such as geopolitical concerns or exceptional events such as a severe hurricane season in the Gulf of Mexico could undermine the current steady market outlook for the driving season. In light of these and other potential factors, OPEC will continue to closely monitor the market to ascertain that oil market stability is achieved and that sound global economic growth is sustained.
