Earlier this week, the International Energy Agency warned that oil market losses would deepen in the fourth quarter.
The reason? The Saudi and Russian cuts were extended through the end of the year.
The deficit may still deepen, but it is already causing pain for energy consumers and driving inflation back up. Just when the central banks thought they had it under control.
The latest inflation data from the United States is a recent example of this. A 10.6% price rise in energy pushed overall inflation to an annualized 3.7% in August. Core inflation rose to an annual 4.3%, raising hopes that the Fed may reconsider its latest decision to stop raising interest rates.
These inflation figures demonstrate how uncertain any economic equilibrium is, even in the world’s largest economy, when energy markets are imbalanced. They also show that forecasts of impending peak oil demand are best taken with a pinch of salt.
The Wall Street Journal reported this week that U.S. industries that rely on hydrocarbons are feeling the pinch from higher fuel prices. Construction, transportation and farming are all being affected due to high prices of fuel, especially diesel. Because despite all the ambitions of EV proponents, electric alternatives to diesel-fueled trucks have yet to present themselves to builders, hauliers and farmers at scale and worth the price and range.
In the case of gasoline, the surge in prices is mostly related to the latest increase in crude oil prices. However, the situation with diesel fuel is serious. Global inventories of middle distillates, including diesel, heating oil and gasoil, are significantly lower than this time of year. Moreover, there is not enough solvency capacity to resolve the cases. Nor is sour enough raw.
John Kemp of Reuters reported this week that distillate fuel inventories in the United States were 16% below the ten-year seasonal average in August this year. That 16% translates into 23 million barrels.
Meanwhile, in Europe, middle distillate inventories were 8% below the ten-year average for August. That 8% translates into 35 million barrels.
The decline has continued for most of the year, although—and this is perhaps the most worrying part—industrial activity slowed during this period in most major consumers, including the US and Europe.
Saudi Arabia’s oil production cut announcement over the summer certainly made the situation worse—the Saudis cut most of the heavy crude grades, which are used to make middle distillates. Similarly, Russian exports were cut. But there was another reason why the world’s middle distillate reserves were much lower than usual: there were not enough refineries.
The problem is acute in Europe and North America, where many refineries were closed during the pandemic and others were converted to biofuel production plants. Remaining capacity appears to be adequate for gasoline production in response to demand but not enough for diesel fuel and other middle distillate demand.
This means that the pain that American manufacturing companies and European freight transportation companies are feeling is not going to subside any time soon. This may worsen as the summer season begins and demand for fuel oil increases.
It would not be the case that only businesses are feeling the pinch. The Biden administration is already concerned about rising gasoline prices and has apparently reached out to the oil industry to do something about it. The industry, like the American Petroleum Institute, basically gave a clear answer.
“It’s clear the U.S. needs more energy production to meet historic levels of demand, but the Biden administration has no plans to restrict production now and in the future,” said the lobby group’s senior vice president for policy, economics and regulatory affairs. Have taken every opportunity.” As cited by Axios.
Meanwhile, as West Texas Intermediate reached $90 a barrel on Thursday, President Biden promised to bring prices down. The problem is that the strategic petroleum reserves are already half empty. And that means Biden can’t repeat the massive drops he used last year to cool prices.
“I’m going to lower gas prices again, I promise you,” the US president said in a recent speech. Yet their options are even more limited than last year. Again, he had a complete SPR. Now, SPR is at 40-year low. A new series of deficiencies will not please anyone.
Manufacturers are not increasing production rapidly by any means. Even if they did, by some miracle, it would not produce the sour, heavy crude used in distillate fuel production. In other words, the pain is going to increase just like the Saudi and Russian production cuts. Unless the administration lifts all sanctions on Venezuela’s PDVSA. This would open up a source of heavy crude to add to shipments from Canada.
But at what cost?
By Irina Slava for OilPrice.com
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