The usual seasonal pickup in oil demand as refiners
ramp up for the summer driving season may be too small this year to overcome
doubts about weakening of oil demand growth that have dragged prices lower this
week, according to industry experts.
Lack of demand from European refiners for Saudi Arabian crude, which prompted
the world's largest exporter to cut 500,000 barrels a day of oil output late
last month, may also persist into summer. This should ease concerns about spare
oil production capacity that have played a big part in pushing up prices in
recent months, industry analysts said.
These two factors reinforce the bearish sentiment that this week reversed a
steady climb in the oil price, they said.
The recent oil price rally was started by stronger demand in the recovering
world economy, but it was the loss of 1.3 million barrels a day of Libyan oil
production because of the civil war that propelled prices to the two-and-a-half
year high of over $127 a barrel for benchmark Brent crude last week.
The cut in Libyan exports, around 70% of which went to European refiners, did
not cause any immediate shortages and members of the Organization of Petroleum
Exporting Countries quickly promised to fill any supply gaps that did emerge
from the oil production capacity they hold in reserve.
Saudi Arabia
pledged to release an extra 500,000 to 600,000 barrels a day onto the market.
Nevertheless, prices have climbed steadily higher, driven in large part by
fears that if political unrest spread to other oil producers,
Saudi Arabia
's
newly diminished spare capacity would fall short.
However, this week after Saudi officials revealed that in the second half of
March they had shut down almost all of this extra production due to lack of
interest from buyers. The sharp fall in prices that followed this, by as much
as $5 a barrel at one point Tuesday, was compounded by reports from the
International Energy Agency, OPEC and Goldman Sachs warning that high oil
prices may already be biting into demand growth.
Thursday, Brent crude remained around $5 below its recent peak at just over
$122 a barrel.
Yet despite these bearish signals, the IEA warned that oil markets could soon
tighten again. The lack of demand for Saudi crude in March was due to temporary
maintenance at refineries and the immediate impact of the Japanese earthquake
and tsunami, which also shut down many refineries, it said. The Saudi supply
cut, "overlooks a crude demand trend which potentially sees throughputs
rise from March lows and add 3 million barrels a day by July," as
refineries restart, it said.
However, others caution that the refining rebound is likely to be weak this
year and among those companies that will be looking for extra oil supplies,
there is little demand for what
Saudi Arabia
is offering.
"Refining margins have been terrible, particularly for those processing
light, sweet crude," said Jonathan Leitch, a senior analyst at consultancy
Wood Mackenzie. "Refiners have either reduced output or are shutting down
altogether."
Leitch said he is definitely not expecting a summer rebound in demand from
refiners as large as 3 million barrels a day. "In April and May we would
be looking for runs to remain fairly tame. Maybe by June or July they could
pick up because of the
U.S.
driving season," he said. At most, refining throughput could grow by 1.5
million barrels a day in OECD countries, he said.
Most European refiners were reluctant to comment on how much crude they intend
to process in the coming months, but there was little sign they were relying on
the Saudis.
"We have always said that the Saudi crude on offer wouldn't do as a
substitute for the Libyan one," said a spokeswoman for Italian refiner
Saras SpA (SRS.MI).
Saudi efforts to create a special blend of crude similar to the lost Libyan
supplies haven't satisfied European refiners, who were turned off by the higher
sulfur content of the oil, said Leitch. The price at which Saudi offered the
oil was also too high, said the IEA.
Saras, which can process 300,000 barrels a day of crude at its refinery on the
island
of
Sardinia
,
has mainly targeted crude from the Caspian area to replace Libyan supplies, she
said.
A spokesman for Spanish oil company Repsol YPF SA (REP.MC) said it bought oil
cargoes on the spot market to offset the loss of Libyan crude, rather than turn
to the Saudis.
Greece
's largest refiner Hellenic Petroleum SA (ELPE.AT) is still getting less
than 6.5% of its crude from
Saudi Arabia
,
said Evangelos Stranis, director of corporate affairs at the company.
To be sure, with no end in sight to the Libyan conflict it is unclear how long
refiners will be able to continue with ad-hoc arrangements to find alternative
oil supplies on the open market.
Competition for light, sweet crude produced in
West Africa
or the Caspian region
could drive the premiums for the grades higher relative to other varieties,
said Leitch. The IEA noted that the rise in premiums for African crudes,
"has prompted a number of Asian refiners to pick up extra Saudi grades for
May." However, Leitch said he did not think that this trend would be
powerful enough to drive the price of the global crude benchmarks higher.
Broader issues, notably the debate over whether oil prices are indeed high
enough to slow the world economy, look set to dominate the market for the time
being.