Crude oil markets to remain highly volatile in 2021 but path to recovery finally visible

Crude oil producers and downstream companies will continue to demonstrate strong capital discipline and maximum cost control in 2021 but the path to a crude oil demand recovery is finally here, the CEO of oil refiner Par Petroleum, Joseph Israel, told Reuters Events.

Image courtesy of Par Pacific

“High volatility and nervousness in the markets are here to stay until we start to see evidence of a strong global recovery. At that point, stronger distillate crack spreads may combine forces with the gasoline season and provide refiners with a well needed strong summer,” he said.

Expectations are that a demand loss of 9 million barrels per day oil in 2020 should be back during 2021 and 2022, Israel said. “Just under two-thirds or 6 million barrels per day recovery in 2021, with the remaining 3 million barrels per day recovery in 2022.”

In the meantime, refiners will control costs, he said.

“The path for oil demand recovery is finally here, fueled by the gasoline season, and challenged by distillate demand,” Israel said.

Diesel demand biggest wildcard

U.S. car gasoline consumption seasonally increases in the summer. Strong industrial production driven by economic growth would help diesel demand recover to pre-pandemic levels.

“The global economic recovery is shifting gears early in the second quarter,” Israel said.

The consensus for global GDP growth is approximately 5.5%, he added. China and Europe are leading the pack with 9% to 9.5% of consensus industrial production growth forecast in 2021, as well as over 5% in the U.S., 7% in Japan, and 4% of 2021 growth in India, he said.

As for jet fuel, consumers have been much more cautious with air travel. This will lead to a slower recovery compared with other fuels.

Rebounding from demand loss in 2020

The 3.2 million barrels per day of jet fuel demand loss in 2020 “forced refineries to drop significant jet fuel volume in diesel, on a consistent basis,” Israel said.

In addition, diesel demand fell nearly two million barrels per day in 2020.

As a result, global distillate reflecting combined jet and diesel inventory is 15% to 20% higher these days compared with pre-pandemic levels, he added.

In 2021, the consensus expected jet fuel demand recovery is around 40% of the lost demand in 2020, Israel said.

Healthier spreads for gasoline, diesel

The global gasoline inventory “is already under pre-pandemic levels, and approximately 15% lower these days than 2020 spring levels,” he said.

The consensus expectations for gasoline demand recovery in 2021 is about 60% of the 3.3 million barrels per day lost in 2020. A low global gasoline inventory and a strong demand outlook are a good recipe for healthy refining gasoline crack spreads in the short term, he said.

“Gasoline crack spreads are mostly at five-years average or better in most markets including the U.S., Europe and Asia,” Israel said.

On the distillate side, the high global distillate inventory is keeping distillate crack spreads low. The economic recovery and the return to air travel “will set demand and crack spreads in the long term, but so far it has been more of an outlook theme, rather than proven progress,” he said.

“As a result, distillate crack spreads are at the low five years range in most markets, including U.S., Europe and Asia,” he added.

Q1 2021 capacity trails pre-Covid levels

The world refiners’ utilized capacity in the first quarter of 2021 was 10-15% below pre-Covid levels, Israel said.

“Considering the recovery assumptions, expectations are for world refineries to close that gap to approximately 5% through the summer. This is taking into account the net additional refining capacity, after deducting idled and converted capacity,” he said.

In addition, over three billion gallons per year of new renewable diesel capacity is expected to be operational by 2024, he added.

“In order to support the anticipated demand recovery, oil production will likely increase, to partially offset last year's crude oil inventory build. After 2020, global crude oil inventory is 400 million barrels higher than pre-Covid levels,” Israel said.

“To allow steady inventory draw, especially in a backwardated market which penalizes storage economics, we should expect producers to intentionally lag demand growth,” he added.

On the supply side there should not be any concern.

“There is plenty of open capacity to work with. Iran, Libya and Iraq are probably best positioned to add production on the OPEC side, along with FSU (former Soviet Union) and Canada,” Israel said.

“Assuming stability on the supply side, and considering OPEC’s proven discipline, we should expect demand and economic recovery to set the oil price through 2021,” he added.

Back in November the outlook anticipated volatility.

By Renzo Pipoli