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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Why There’s Still Room For Oil To Go Higher

Refinery China

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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  • Mamdouh Salameh on December 18 2020 said:
    Of course there is room for crude oil prices to go higher. Two major factors stand out. The first is that Asia oil market, the biggest in the world is strengthening with rising demand from both China and India, the world’s largest and the third largest importers of crude oil respectively.

    The second factor is that the global economy is projected to grow by an estimated 5.4% in 2021 and 3.7% in 2022 led by emerging markets particularly China and India both of which are projected to grow in 2021 at 8% and 8.3% respectively according to projections from the IMF.

    Brent crude is projected to hit $60 in the first quarter of 2021 and $70-$80 in the third quarter. This trajectory will give an average price of $65-$70 in 2021 and testing $100 by 2024.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • George Doolittle on December 18 2020 said:
    Certainly the cost of shipping any product let alone energy product has soared. Oddly enough this has turned the United States into a massive importer of oil quite suddenly even though the USA plus Canada plus Gulf of Mexico produces far more energy product than the USA can consume in a day let alone a Month or as Bev's start becoming ubiquitous even in a Year. That says to me the futures price of oil is completely divorced from reality even excluding the massive amounts in storage in both the United States and China. In other words with the US Dollar in free fall one should expect dirt cheap US energy product to soar but in particular oil as it is so very cheap to ship. Instead the exact opposite has occurred which presumably means the oil product plus shipping is so cheap even with the very weak US Dollar the World needs US Dollars no matter the cost. So far I would agree retail prices for generic crude oil and its innumerable distillate fuels have been very well priced I agree but at some point the lack of demand ... a near total lack of demand going into Springtime... must intersect with a straight up tsunami of supply both in very expensive storage but also quite possibly very cheap if not dirt cheap production within North America to include the Gulf of Mexico.("in the production of natural gas there is always the production of some amount of crude oil.)

    Obviously no one is arguing US natural gas production is at some very low amount not lacking in demand. That makes my price for oil in the USA including distribution at on or about one US Dollar a barrel with US gasoline prices excluding taxes around ten cents a gallon if not less at retail.

    If there is some attempt to corner the price in the US WTI market one perhaps going on decades the losses from such a collapse as happened in March of this Year 2020 would indeed be cataclysmic and indeed US Treasuries seem to be pricing not just such a speculative bubble but indeed one that could be made far worse should the US credit outlook be downgraded yet again. Any "knock on effects" from such a contingency would make the 2008 financial collapse look like a nothing burger especially with "The Covid-19" as the backdrop of "A Dark Winter."

    The US Federal Reserve does seem to have its "head in this game" on a positive note.

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