WORSENING trade tensions between the US and China have cast a dark cloud over crude prices. Add a heavy shower of refinery closures for maintenance works and it’s easy to see why oil markets are facing a perfect storm.

Demand side fears have fueled the slide in crude oil prices. ICE Brent futures lost around $16/barrel, or 21%, of their value in early June from a 2019 high of $75.60 seen on April 25. Experts agree that a glum outlook for the global economy is to blame.

“Financial markets continue to price in an increased probability of ‘recession’ in the next year,” Chris Midgley, Global Head of Analytics at S&P Global Platts said recently.

Bickering over trade between China and the US – the world’s largest economies and consumers of crude – are causing forecasters problems. Platts Analytics has revised its oil consumption growth forecast lower. In Asia, which accounts for around 60% of global demand growth, refined oil product use is expected to grow by 800,000 b/d in 2019, down from 910,000 b/d in 2018. This marks the weakest performance since 2014, according to Platts Analytics.

Both China and India – together contributing 95% of total regional demand growth in Asia – are expected to see weaker increases in consumption due to slowing economies and tepid auto sales.

China’s oil product demand growth is expected to ease to 560,000 b/d this year, from 660,000 b/d in 2018, according to Platts Analytics. While in India, the growth forecast for 2019 has been revised down by 40,000 b/d to 200,000 b/d for this year.

Despite these headwinds, oil prices should still see some recovery starting this month as refinery activity picks up. More activity from refineries should begin to simultaneously increase demand for crude and draw down stocks.

Refinery downtime peaked in May this year with around 9.5 million b/d of capacity shut in, up by about 920,000 b/d from April and nearly 2.5 million b/d higher than in the previous year, Platts Analytics said in a recent report highlighting the shift in balances. From the peak in May, outages are expected to fall rather sharply to 7.47 million b/d for June. 

This should help draw down stocks, particularly in the US, which has seen a counter-seasonal build. The five-year average of data from the US Energy Information Administration shows stocks typically declining starting in May and heading into the summer as refiners increase runs. However, US stocks are up roughly 17 million barrels since May 3. At 483.26 million barrels in early June, these stock levels are 7.2% above the five-year average.

Heightened geopolitical risks

Supply side worries have also eased with other producers stepping in to make up for lost production from Iran. According to the International Energy Agency, “solid gains” in production from Libya, Nigeria and the US had offset production falls in April from a range of countries, including Azerbaijan, Canada, Iran and Kazakhstan. However, heightened geopolitical risks cannot be ignored. 

Separate attacks on Saudi Arabia’s key East-West oil pipeline and oil tankers near the vital Strait of Hormuz in May sent risk premiums for Middle East freight soaring. Also supporting prices is a high probability of a production cut roll over by OPEC+.

Saudi energy minister, Khalid al-Falih, said on June 7 that OPEC is ready to commit to extending its oil production cuts beyond their June expiry. “I don’t think I’d be giving away a secret if I said that on the OPEC side, the rollover is almost in the bag,” Falih said at the St. Petersburg International Economic Forum, after meeting with Russian counterpart Alexander Novak.

Saudi Arabia has cut its own production to 9.65 million b/d in May, the minister said, far below its quota of 10.31 million b/d, to demonstrate its commitment to rebalancing the market.

OPEC and 10 non-OPEC allies led by Russia agreed in December to cut a combined 1.2 million b/d in supplies through June to help drain global oil inventories and bolster prices. But despite strong comments from Falih that he would like to see the cuts extended, the coalition has not yet announced any decision.

“We expect tightening balances and crude stock draws in the second half of the year to raise the call for OPEC+ crude, but market weakness and rising demand-side concerns reduce any urgency to deviate from the current strategy of rebalancing markets,” said Paul Sheldon, chief geopolitics adviser for S&P Global Platts Analytics.

Mriganka Jaipuriyar, head of news for Asia, S&P Global Platts