The New Rules of the Global Oil Market

By Michael Tran
Published July 25, 2019 | 1 min read

Although crude prices could increase due to increasing geopolitical risk, RBC’s Managing Director and Global Energy Strategist Michael Tran argues that any rally will be limited if demand for refined products does not start picking up. As a result, we expect Brent and WTI prices to average $69.50/bbl and $63/bbl, respectively, through the balance of this year.

The Oil Paradox

Not all markets are created equal. Rebalancing a supply driven market is materially easier than finding equilibrium in a market driven by demand weakness. The past five years yielded a market stemming from the former, while the years ahead will likely center on the latter. Global refinery runs peak in the summer. While bullish for crude demand, refinery utilization warrants watching given that margins are weak in many regions, particularly in Asia and the Mediterranean. This signals either softening end user demand for refined products, a regional excess of supply, or both. The rules of bullishness are different in a demand driven market.

Global Refining Margins: The Vicious Cycle

Supply outages are headline bullish, but in a softening demand market, a major supply outage from a geopolitical hotspot triggering a rally in crude prices could squeeze refining margins from both ends and result in wide spread economic run cuts and lower crude demand. The most structurally bullish scenario for the next cycle is one in which poor margins lead to several Asian or European refineries shutting, resulting in an expansion of refining margins and increased global utilization and a crude production outage in a geopolitically fraught country. In other words, cleaning up sloppy product balances is required before crude can stage a sustainable and material rally. Such a development would be constructive for the entire oil complex even with a softer demand growth backdrop.

The Release Valve

Slowing demand growth and the structural addition of refining capacity in China means that the region is saturated with refined products like gasoline and distillate. Ultimately, the inability to find the incremental bid leads to wide spread weaker margins. The redrawing of the refined product map will continue until either demand improves, refiners cut runs or fall turnarounds take place. Recent refinery closures on the US East Coast may prove to be the release valve for an otherwise soggy global gasoline market.


Michael Tran
Managing Director, Energy Strategist, Global Research


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