Crude Balance Revisions – Impact of Policy Shifts
June 17, 2022
The latest revision of global crude balance data revealed a higher-than-expected buildup for the month of May, with a little over 800,000 b/d (Figure 1). However, looking at the bigger picture we note the inventory buildup for the first half of 2022 is expected to reach 350,000 b/d, a relatively small number considering the rallying global demand at the refinery level. Going forward, the expectation is for demand to continue to outpace supply, leading to further de-stocking and likely contributing to sustained weakness in the VLCC market.
There were two policy shifts that could have a direct impact on the crude oil balances. The first was the US Federal Reserve Bank decision to hike interest rates by 0.75% and the other was OPEC and allies’ decision to increase production by 648,000 b/d starting in July.
For the former, it is still too early to make any projections considering the strengthening dollar has not done much for crude prices in the last few days, which continued to increase on the back of supply concerns. It is possible, though, that this development will gradually dampen crude oil demand, and allow supply to catch up. The result will be a tempering of barrel prices and possibly some incentives to increase inventory buildup, typically a positive for crude tankers.
Regarding OPEC and allies, it remains a question whether the organization would be able to produce its quota. With that in mind, the bulk of additional supply will likely be available in the Middle East, and we anticipate some of that to be absorbed locally considering the recent startup of the Al-Zour refinery in Kuwait as well as other regional capacity additions. For the rest of the world, we anticipate crude balance to remain tight, especially as European and US refiners have exited maintenance and are increasing runs to meet demand for the summer driving season.
With China ramping up purchases of Russian crude and India already receiving large volumes, the balance of the extra supply may well find its way to the European region, which is recently deprived of Russian crude, and possibly on an increasing number of VLCCs. We expect a higher number of these ships will elect to ballast to the Americas, bringing additional competition in the relatively strong Suezmax and Aframax classes on transatlantic trades.
Figure 1 – Global Crude Supply, Demand & Balance
Source: McQuilling Services, JBC Energy
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