Earlier this week, the International Energy Agency warned that oil markets were in a deficit that would deepen in the fourth quarter.
The reason? Saudi and Russian cuts that were just extended until the end of the year.
The deficit may yet deepen, but it is already causing pain to energy consumers and reigniting inflation. Just when central banks thought they'd got it under control.
The latest inflation data from the United States is one recent example. A 10.6% price rise in energy drove overall inflation to an annual 3.7% in August. Core inflation rose by an annual 4.3%, prompting expectations that the Fed may reconsider its latest opinion to stop raising interest rates.
These inflation figures show how precarious any economic balance is, even in the world's largest economy, when energy markets are imbalanced. They also show that forecasts of imminent peak oil demand are better taken with a pinch of salt.
The Wall Street Journal reported this week that U.S. industries dependent on hydrocarbons are feeling the pinch from higher fuel prices. Construction, transport, and farming are all suffering because of higher fuel prices, especially diesel. Because for all the ambition that EV advocates demonstrate, electric alternatives to diesel-fueled trucks have yet to present themselves on a scale and at a price and range worth builders', freighters', and farmers' while.
With gasoline, the price jump has mostly to do with the latest rise in crude oil prices. With diesel fuel, however, the situation is grimmer. Global inventories of middle distillates, including diesel, heating oil, and gasoil, are palpably lower than they usually are at this time of the year. On top of that, there is not enough refining capacity to remedy matters. Neither is there enough sour crude.
Reuters' John Kemp reported this week that distillate fuel inventories in the United States were 16% lower than the ten-year seasonal average in August this year. That 16% translates into 23 million barrels.
In Europe, meanwhile, inventories of middle distillates were 8% lower than the ten-year average for August. That 8% translates into 35 million barrels.
The decline has been accumulating for most of the year, even though—and this is perhaps the most concerning part—industrial activity in most large consumers, including the U.S. and Europe, slowed down during the period.
Saudi Arabia's oil production cuts announced in the summer certainly aggravated the situation—the Saudis mostly cut heavier crude grades that are used to make middle distillates. So did Russian export cuts. But there was another reason why the world's middle distillate stocks are so much lower than normal: there are not enough refineries.
The problem is acute in Europe and North America, where a number of refineries were shut down during the pandemic, and others were converted to biofuel production plants. The remaining capacity appears to be sufficient for gasoline production in response to demand but not adequate for diesel fuel and other middle distillates demand.
All this means the pain that U.S. construction companies and European freight transport firms are feeling is not going to let up anytime soon. It may even worsen as heating season begins and demand for fuel oil increases.
It won't be just businesses feeling the pinch, either. The Biden administration has already demonstrated alarm about rising gasoline prices and has reached out to the oil industry to, apparently, do something about it. The industry, in the face of the American Petroleum Institute, basically responded with a flat no.
"It's clear America needs more energy production to meet historic levels of demand, but the Biden administration has instead taken every opportunity to restrict production both now and in the future," the lobby group's senior VP of Policy, Economics, and Regulatory Affairs said, as quoted by Axios.
Meanwhile, as West Texas Intermediate hit $90 per barrel on Thursday, President Biden pledged to bring prices down. The problem is, the strategic petroleum reserve is already half-empty. And that means Biden can't repeat the massive drawdown he used last year to calm prices down.
"I'm going to get those gas prices down again, I promise you," the U.S. President said in a recent speech. Yet his options are even more limited than they were last year. Then, he had a full SPR. Now, the SPR is at a 40-year low. A new series of drawdowns will not go down well with anyone.
Producers are in no way going to ramp up production fast enough. Even if they do, by some miracle, it won't be the production of sour, heavy crudes used in distillate fuel production. In other words, pain is going to extend, just like the Saudi and Russia production cuts. Unless the administration lifts all sanctions on Venezuela's PDVSA, that is. That will open up a source of heavy crude to add to shipments from Canada.
But at what cost?
By Irina Slav for Oilprice.com
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