Why There’s Still Room For Oil To Go Higher

Crude oil prices are on the rise again after a short reversal of fortunes prompted by a huge crude oil inventory build reported by the U.S. EIA last week and renewed worry about demand. And the reason they are rising is, in fact, demand from China and India. China has been the main driver of oil prices this year because of its massive refining capacity and growing storage capacity. To fill up its reserves, China went on a buying spree earlier this year, when oil was at its lowest, battered by the Saudi-Russian price war and the looming pandemic. Now reserves may be full, but Chinese companies are still buying-and driving prices higher.

Bloomberg reported this week Chinese and Indian refineries are buying more crude oil than last month, pushing prices up, in some cases by as much as $3.50 per barrel over the benchmarks. The spot market has also seen a revival thanks to the appetite of Asian refiners, the report noted.

The increased buying comes amid surging refinery rates in China. Last month, the average daily processing rate in the country hit 14.2 million bpd, up 3.2 percent on the year. This was a new all-time high, shattering the previous record set a month earlier, in October.

In India, state refiners are operating at full tilt, according to another Bloomberg report, as gasoline demand surges despite, or rather because of, the pandemic. A growing number of people in India are choosing to drive their own cars instead of using public transport, which is at the heart of the gasoline demand rise.

Both countries are boosting their refining capacity in the meantime. China is already on track to surpass the United States as the world's biggest oil refiner next year or the year after. Last year, refiners added some 1 million bpd to existing capacity, and there is another 1.4 million bpd of capacity under construction. Some believe a lot of this capacity will end up unusable as the country moves towards a more renewable-heavy energy mix.  Related: Goldman Turns Bullish On Oil: Sees $65 Brent In 2021

For now, though, it appears that all added capacity is being used.

India is boosting its capacity for oil refining, too. In November, Prime Minister Narendra Modi surprised many when he said there were government plans to increase the country's refining capacity twofold over the next five years. Earlier this year, Modi had said the plan was to double India's refining capacity over ten years, but strong demand must have made the government reconsider the timeline. Currently, India has a refining capacity of 250 million tons, or a little more than 5 million bpd, based on a conversion factor of 7.33 barrels per metric ton of oil. 

"Asia is very much driving the market at the moment," Energy Aspects analyst Kitt Haines told Bloomberg. "We will need the Asian buying momentum to sustain, otherwise things could get weak."

If Asia's buying momentum does not continue indeed, things can get very weak. The World Bank recently said it expected oil prices to average $44 per barrel next year. That's despite vaccine news as consumption will remain at lower than pre-pandemic levels, according to the World Bank. Others, such as Goldman Sachs, are more optimistic, citing mass vaccinations as the driver of higher oil prices, seeing Brent at $65 per barrel in 2021.

Yet vaccinations on their own will not be enough, however fast they are rolled out. Europe and the U.S. will yet take months to return to growth, while China's economy has already snapped back to growth. India's GDP is also recovering faster than expected, and GDP could soar by 10 percent in financial 2021/2022. It is no surprise, then, that these two countries together are driving oil prices higher. The only problem is that a stumble for either of them will mean an immediate slump in prices.

By Irina Slav for Oilprice.com

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