Oil traders price in tighter supply in energy markets

Saudi Aramco stock is rallying on Sunday as the US and Israel’s war in Iran entered its second week, with the state-backed oil giant recording its biggest intraday surge since April 2023.

Investors in Riyadh had last week returned to the market for the first session since Brent crude broke above $90 a barrel on Friday.

Aramco’s stock surged by as much as 4.9% during trading before cutting some of that gain and finishing the day up 4.1%.

Saudi Arabia is sending unusually large volumes of crude to its Red Sea coast for export, which is easing some of the strain. Ship-tracking data show shipments from the kingdom’s western terminals have climbed to about 2.3 million barrels a day so far this month.

That is roughly 50% higher than any monthly Red Sea export rate Saudi Arabia has recorded since the end of 2016. Even so, it is still well below the roughly 6 million barrels a day the country has recently been exporting from the Persian Gulf.

Oil traders price in tighter supply in energy markets

Brent, the global benchmark, had a high week last week, as Cryptopolitan reported. Then the pressure grew after the United Arab Emirates and Kuwait began reducing oil production, while the Strait of Hormuz got shut down, along with about one-fifth of the world’s energy exports.

Before those latest developments, many traders had already been expecting that oil prices would hit $100 within days unless the fighting eased or the limits around the strait changed.

Goldman Sachs said the world has stockpiles of about 8 billion barrels of oil and refined products, reserves that could help soften the blow even though they cannot be counted on to fully cancel out the damage from a prolonged disruption.

That is why the market is also focusing on the possibility of a 2 million barrel-a-day shortfall, which equals about 2% of global oil consumption, according to Goldman.

The last time oil prices were followed by a 2% fall in consumption was between 2007 and 2009, as Stifel analysts noted. That period is not a perfect match for today.

During that earlier stretch, the global financial crisis made demand weaker, which helped push consumption lower. At the same time, oil prices rose more gradually, which gave countries and businesses more time to adjust.

The global economy had also been growing more strongly before conditions worsened. Even with those differences, the price peak from that period still stands out. Oil reached $147 a barrel, which equals about $222 in today’s money.

Chinese oil producers gain from higher crude while refiners face a harder squeeze

The same oil shock lifting Saudi Aramco is also changing the outlook for China’s big energy companies. Goldman Sachs Asia Pacific energy analysts said that even with Brent at $80 to $90 a barrel, the full-year free cash flow of China National Offshore Oil Corporation, or CNOOC, and PetroChina could rise by more than 10%.

Goldman rates both stocks a buy. As of midday March 2, the bank had been pricing in an average Brent price of $70 a barrel, so the new range points to a much stronger earnings backdrop for upstream producers.

Both CNOOC and PetroChina hit 52-week highs on March 3, though both later gave back part of those gains before the week ended. CNOOC grew out of offshore oil exploration and production with foreign partners.

PetroChina has a more domestic business mix that also includes refining and distribution. The two companies are part of China’s three state-owned oil majors.

Goldman was less positive on the third one, Sinopec. The company is the world’s largest refiner and also became the largest chemicals producer last year. Its shares also touched a 52-week high on March 3. But Goldman’s analysts said Sinopec could face more pressure than benefit if oil prices keep rising. They wrote that:-

“For Chinese refiners like Sinopec, given the domestic product ceiling calculation mechanism does not factor in increases in international freight rates or [official selling prices], we see the net impact as skewed to the negative side.”

After the Iran war intensified, China reportedly ordered its biggest state refiners to suspend exports of diesel and gasoline because of concerns that the conflict could disrupt reliable access to energy.

If you're reading this, you’re already ahead. Stay there with our newsletter.