Just a few days ago, when oil prices exceeded $90 per barrel, military tensions between Israel and Iran were a direct trigger. But the basis for this rally was deeper, in a global supply shock that heightened concerns about a resurgence in commodity-driven inflation.
Mexico’s recent moves to cut oil exports are exacerbating the global squeeze, prompting refiners in the world’s largest oil producer to consume more domestic barrels. With Russian cargo stranded at sea due to US sanctions, supplies from Venezuela could be the next target. Houthi attacks on tankers in the Red Sea have caused delays in oil shipments. And despite the turmoil, OPEC and its allies are sticking with production cuts.
Read more: Mexico suspends some oil exports, weighing on global markets
All of this adds up to enough supply disruptions to surprise traders. A sharp rise in oil prices ahead of the US summer driving season threatens to push global benchmark Brent crude prices to $100 for the first time in almost two years. This has exacerbated inflation concerns, clouded U.S. President Joe Biden’s re-election chances and complicated the central bank’s efforts to cut interest rates.
For oil, “the bigger driver right now is on the supply side,” Amrita Sen, founder and research director at Energy Aspects, said in an interview on Bloomberg Television. “We are seeing quite a few spots of supply shortfall, but overall demand on a global scale is healthy.”
Oil shipments from Mexico, a major supplier to the Americas, fell by 35% last month, as President Andrés Manuel López Obrador seeks to fulfill his promise to withdraw from expensive fuel imports, dropping by 35% in the last month and 2019. It was the lowest since 2016. Bloomberg News reported last week that state-run oil company Pemex canceled some supply contracts with foreign refiners, resulting in the country’s so-called sour crude, the heavy crude oil that many refineries are designed to process. Exports of high-density crude oil) are expected to contract further.
The decision rattled oil markets around the world. Mars Blend, a medium-density sour crude from the U.S. Gulf Coast, has risen to a multi-year premium over the country’s benchmark, lighter West Texas Intermediate, in recent days. Mars typically trades at a discount to WTI. Brent crude hit $90 a barrel on Thursday, its highest since October, and extended its gains on Friday. JPMorgan Chase & Co. said it could reach $100 by August or September.
Canadian Cold Lake crude, priced on the Gulf Coast, traded at the narrowest margin in nearly a year versus WTI. Key benchmarks for medium-sour crude oil in the Middle East, including Oman and Dubai contracts, are also rising.
Read more: Oil producers turn the screws as market tightens: Energy Daily
Mexico’s move was preceded by a series of supply disruptions of various sizes. In January, the freeze caused U.S. crude oil production and inventories to plummet during a period of normal increase, and inventories remained below seasonal averages through late March.
Mexico, the United States, Qatar and Iraq collectively cut oil flows by more than 1 million barrels a day in March, according to tanker tracking data compiled by Bloomberg. Baghdad has promised to limit production to compensate for noncompliance with previous commitments to the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+.
Adding to the squeeze, OPEC member United Arab Emirates cut shipments of Upper Zakum, a medium-sour oil, by 41% in March compared to last year’s average, according to data from maritime information firm Kpler. I put it on. Traders say state oil companies are directing that crude supply to their own refineries. Production cuts expected, with Abu Dhabi National Oil offering buyers a different type of oil as an alternative, but lower exports from Upper Zakum contribute to regional price rises amid broader OPEC+ production cuts are doing.
Meanwhile, European oil markets came under upward pressure from Houthi attacks in the Red Sea. Millions of barrels of oil are being bypassed around Africa, with some supplies delayed for weeks. Disruptions to a major North Sea pipeline, unrest in Libya and damaged pipes in South Sudan also contributed to the rise, while U.S. sanctions have stripped Russia of tankers that previously transported oil to buyers such as India. .
The supply shortage is likely to worsen in the coming weeks. The Biden administration could reimpose sanctions this month as President Nicolas Maduro shows no signs of heeding promises to move toward free and fair elections.
Analyst Samantha Hartke said the market for heavier, dirtier crude oil has been “in a bearish range for some time now, but this tight market and the outlook for the U.S. summer driving season is a sign that the market is “This suggests that we are turning a corner.” Partnered with analytics company Sparta Commodities.
This is a marked contrast to just a few months ago, when oil prices fell to multi-month lows as U.S. production increased and Russian seaborne crude oil exports gradually increased despite sanctions that have since been expanded. It is a contrast. The U.S. Energy Information Administration had expected global inventories to be flat this quarter, but now expects them to fall by 900,000 barrels per day. This is equivalent to the production volume from Oman.
As demand increases, supply tightens. U.S. refiners are preparing to ramp up fuel production for the summer, when millions of Americans will be on the road and gasoline consumption will peak. Gasoline inventories on the populous East Coast are tight, and manufacturing activity in the U.S. and China is also showing increased fuel use. In Asia, refining margins are about 50% higher than the seasonal average over the past five years, suggesting healthy demand.
The rise in oil prices has angered the Biden administration’s plans to urgently replenish U.S. oil reserves, which have hit a 40-year low following unprecedented resource depletion after Russia’s invasion of Ukraine. It’s also a political risk for Biden, as food and energy prices remain high. Oil’s rise threatens to push retail gasoline prices, which currently average around $3.60 a gallon nationally, closer to the key psychological level of $4. This has raised concerns that commodities will reverse the recent slowdown in consumer price growth.
Oil prices are now pushing up U.S. inflation after being subtracted from late last year. This may become clear again in the March consumer price index, which will be released on Wednesday. Overall CPI is expected to accelerate on a yearly basis, while core indicators excluding food and energy are expected to decline. The Bloomberg index of major commodities hit its highest level since November.
Vikas Dwivedi, global oil and gas strategist at Macquarie Group, said rising oil prices could eventually force OPEC+ to scale back some production cuts. And according to JPMorgan, oil significantly above $90 could destroy global demand and ultimately lead to lower prices. But for now, there is still little sign that that will happen.
“There’s no question that this is a market with solid fundamentals,” Bob McNally, founder of consultancy Rapidan Energy Group and former White House adviser, said in an interview on Bloomberg TV. “I think $100 is absolutely genuine. We just need to risk price the real geopolitical risks a little bit more,” he said in an interview on Bloomberg TV.