Seasoned oil market observers have struggled to find an adequate explanation for the surge in Brent prices over the past fortnight, which has taken front-month futures to the highest level since July 2011.
But the conundrum becomes easier to unravel if the focus is switched from the overall crude supply-demand balance, which remains comfortable, to balances for individual fuels (especially distillates) and the types of crudes being impacted by the supply disruptions.
Dieselisation and the increasing imbalance in the global refining system (producing too much gasoline and not enough diesel) has made the crude markets particularly vulnerable to the loss of diesel-rich crudes, which is why both crude prices and European gas oil futures have been rising in recent sessions in response to the loss of exports from South Sudan.
Most analysis of the oil market still focuses on the overall supply-demand balance, implicitly treating all crudes as undifferentiated. But the price surges triggered by Libya and North Sea outages in 2011, and now Sudan in 2012, illustrate the need for a more fine-grained approach, in which relatively small losses of key crudes (low in sulphur or rich in middle distillates) can produce an outsized response in prices.
PAPER VERSUS PHYSICAL
There has been a strange disconnect between the financial (paper) markets, which appear comfortably supplied, and reports from traders of far greater tightness in the physical (crude) markets, as my colleague Javier Blas explained in the Financial Times last week ("Crude defies supply and demand forecasts", Feb 9).
After months of ignoring escalating tensions with Iran, the never-ending crisis in Europe, and first signs of a slowdown and then recovery in the United States and China, crude futures have been shaken out of their torpor by a series of apparently minor developments.
Observers have blamed the transit dispute between Sudan and South Sudan, as well as lingering problems in the North Sea, for adversely affecting crude supplies.
Cold weather across Europe has signalled the belated arrival of winter and focused attention on distillate supplies. And signs of economic recovery and continued central bank stimulus have rekindled appetite for risk assets.
But on a global scale these supply disruptions are small. Current losses from South Sudan and the North Sea amount to perhaps 350,000 barrels per day, which is tiny compared with the 1.3 million barrels per day of exports lost from Libya plus the losses from the North Sea and Azerbaijan last year.
Cold weather will make only a small and temporary addition to seasonal fuel consumption.
Economic news from the United States and China might have improved recently, but the International Energy Agency (IEA) has nonetheless cut its forecast for demand growth by 250,000 b/d to just 800,000 b/d in 2012, less than 1 percent higher than 2011, citing persistent economic weakness in Europe and worldwide .
None of these developments seem significant enough to justify the rise in oil prices to a six-month high....MORE