Oil: Precarious supply-demand and inventories – TD Securities

Ryan McKay at TD Securities describes a precarious global Oil market where Middle East flows have returned to pre-war levels but logistics remain distorted, keeping a sizeable risk premium embedded. High-frequency data show crude surplus building mostly on water while onshore inventories draw, with product markets still in heavy deficit and likely forcing future crude market tightening.

Global crude balance and product deficit

"The global energy market remains in a precarious state. While flows from the Middle East via the Strait of Hormuz, the Gulf of Oman and through bypass pipelines have returned to pre-war levels, market pricing has remained elevated. Improved demand, still tight product markets, and an escalation supply risk premium, due to persistent Houthi attacks on Saudi infrastructure and IRGC tanker attacks, are the main reasons prices remain elevated."

"The tanker shuttle trade around the coast of Oman is expensive, requires constant US Navy support and has logistical frictions tied to increased loading and travel times due to ship-to-ship transfers, which has also contributed to sky-high freight rates."

"Looser supply-demand, but drawing inventories and higher prices. Our high frequency crude oil supply-demand data implies a surplus growing to near 2-3m b/d recently, however this implied surplus is thus far only contributing to a build up of oil on water, while onshore commercial inventories continue to decline."

"On the flip side, global petroleum product markets remain in an estimated deficit of over 2m b/ d, suggesting the crude market will likely need to tighten again at some point to alleviate the product market pressures."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)