Oil prices are up more than 60% from the 12-year lows of around $27/b hit by ICE Brent and the $26/b
recorded by Nymex WTI in January, even with the 7% slide in July. For five months, to the end of June,
oil prices surged to the low $50/b amid an easing global supply glut, strong consumption in several
countries, declining production in many regions, some supply disruptions and a weaker US dollar. The
return of a significant increase in speculative long positions betting on higher prices also supported the
market.
This rally faded amid concerns that the supply overhang in crude, and particularly refined products,
would pressure prices, delaying a long-anticipated rebalancing in the market. Additionally, the outcome
of the UK referendum and uncertainties regarding the timing of the UK’s exit from the European Union
impacted sentiment in the broader financial markets, including for crude oil.
Despite the fall seen in crude prices, refining margins have been weakening during the last month due to
high product inventories, which were caused by the lower-than-expected increase in demand. There are
lingering concerns that the US and European refiners could cut runs in response to a declining gasoline
crack in both regions in a period when summer driving and margins should have been at their highest
during the year. This has been the major factor contributing to the downward pressure on
crude prices in recent weeks.
Meanwhile, regarding the transatlantic Brent-WTI spread, even with the slight widening in July, the yearto-date
average of the spread shrunk to around $1.50/b from an average of near $5/b in 2015, amid
declining US production and despite some outages in light sweet crude. The significant narrowing of the
Brent-WTI spread made it possible for a comeback of West African crude to the US market, as observed
in higher US crude imports, which have been above 8 mb/d recently.
With the end of the driving season in 3Q16, gasoline demand could see a seasonal downward
correction. Meanwhile, the supply side could also continue exerting pressure on middle distillates as
inventories remain high worldwide, especially in OECD countries, which are currently around 80 mb
higher than the latest five-year average.
At the same time, the higher growth anticipated for some of the major oil consuming economies is
expected to lead to higher oil consumption in coming months, particularly with the onset of the winter
season in the Northern Hemisphere. Furthermore, with the expected increase in demand, the ongoing
contango in the Brent, WTI and Dubai markets should continue to narrow. This would reduce the
economic incentive to store crude, which has already begun to help ease some of the overhang, which
would contribute to the expected rebalancing of the market.
