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July 03, 2023Crude oil and refining: Quarter two performance
Greater acceptance of potential recessionary pressures on global oil demand outweighed risk of tightening supply side management and prices fell to an eighteen month low down 30% on the year
A broadening view of weakening oil markets was apparent as slowing throughput of manufacturing operations curtailed demand for crude oil in a deteriorating global economic climate. Deeper cuts to production announced by OPEC+ briefly shocked markets but the consensus view soon returned to a lengthy position. Brent prices retreated to an eighteen-month low approaching US$75 per barrel in May as the risk premium applied alongside the evolving conflict in Ukraine was displaced. Refinery margins fell heavily as crack spreads narrowed. A steeper downturn in gas prices coupled with subdued demand for petrochemicals offered proportionately greater cost savings in petrochemical feedstocks.
Opportunity for oil demand upside around post-COVID economic transition in China faded as Western markets succumbed to harsh economic climate through first half of year.
Annual growth in global oil demand slowed to two percent in opening quarter of 2023 as slackening throughput of global manufacturing industry countered growth focused on post COVID economic transition in China. Oil demand in China leapt 23 percent on the year in April as lifting COVID19 restrictions added 3.12 million barrels per day (mmbpd). Western markets were most exposed to deteriorating economic climate. European oil demand contracted for six consecutive months into April where volumes were down 1.5 percent on year. Oil demand in United States fell for four consecutive months into March when volumes were down 0.3 percent on the year. Consistent growth in kerosene demand offset diminishing industrial demand for diesel. Weak petrochemical markets cut European naphtha demand for nine consecutive months.
OPEC + announced deeper supply cuts as greater acceptance of demand side risk of economic recession plunged oil prices by a third in six months to March to settle below $75/bbl
Global oil production was promptly cut as a broadening view of weakening oil markets emerged and oil prices retreated to lower price point. Global oil production peaked at 101.7mmbpd in January and fell to a ten month low at 100.2 mmbpd in May. Latest production cuts were headed by more stringent OPEC+ supply quotas which were cut 2.0 mmbpd from November and extended through 2023. OPEC members accounted for 60 percent of the 1.5 mmbpd reduction in world oil supply through first five months of the year, with much of the remainder accounted for by Russia. Global oil production in May remains up 1.4 mmbpd on the year despite cutting a similar volume through the first five months of 2023. Deeper voluntary cuts totalling 1.6mmbpd and extension through 2024 were unexpectedly announced at the latest OPEC meeting in April.
Potential supply shock prompted steepest upturn in oil prices for nine months as Brent rebounded above $85 per barrel into April. Recessionary fears and pessimistic demand outlook abruptly reversed price gains.
Oil prices briefly increased sharply as the market digested news of further commitments to OPEC+ supply side management. Renewed focus on supply side risk prompted steepest price rise for nine months as Brent crude oil prices increased eight percent to average US$85 per barrel in April. The upturn in prices was swiftly surrendered as downside risk of faltering demand in deteriorating global economic climate returned to dominate influence on prices. Brent prices retreated to an eighteen-month low approaching US$75 per barrel in May. Average crude oil prices through April and May eased towards price point in closing months of 2021 ahead of application of the risk premium around the emerging conflict in Ukraine.
Easing of the recent critical pinch in global energy markets extended savings in petrochemical feedstock costs as crack spreads narrowed and refinery margins retreated.
Cost of petrochemical feedstocks sourced from refineries fell ahead of easing crude oil prices as slack demand for petrochemicals diverged from robust seasonal demand for transportation fuels. Naphtha prices dropped below US$600 per ton for the first time in two years as crack spreads narrowed. Refinery margins have halved over the last year. Petrochemical feedstocks sourced from gas streams offered deeper cost savings after gas prices halved through the opening quarter of the year. Slowing seasonal heating demand widened the discount on propane relative to naphtha towards 25 percent to settle at a thirty-month low approaching US$400 per ton.
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Quarterly Business Analysis: Global - Petrochemicals, Polymers and C1 Chemicals - Q2 2023
The Quarterly Business Analysis provides key insight into production economics for a broad range of commodity petrochemicals, polymers and C1 chemicals. The analysis presents a review of costs, prices and margins for typical production assets, providing a valuable view of regional and value chain competitiveness and is is available for each key price setting region - Asia Pacific, Middle East, Western Europe and the United States. A quarterly report provides insightful commentary to illustrate current trends, related to recent market developments. The accompanying database is updated monthly.
Upcoming webinar...
In this 45 minute webinar, NexantECA will present its views on the industry performance during the second quarter of 2023, as well as summarise how petrochemical production economics have reacted, sourcing material from the Quarterly Business Analysis reports.
Wednesday, July19, 2023 @ 9AM BST
Duration: 45 minutes
Wednesday, July 19, 2023 @ 2PM BST
Duration: 45 minutes
About the Author...
Andrew Powell, Project Manager
Andrew has 20 years of experience analysing petrochemical industry performance with NexantECA. He is an expert in assessing production economics and preparing price forecasts spanning the full petrochemical industry value chain, from refinery to specialty chemicals. Andrew leads development of NexantECA Subscriptions analysis of profitability and pricing across the global petrochemical industry.
About Us - NexantECA, the Energy and Chemicals Advisory company is the leading advisor to the energy, refining, and chemical industries. Our clientele ranges from major oil and chemical companies, governments, investors, and financial institutions to regulators, development agencies, and law firms. Using a combination of business and technical expertise, with deep and broad understanding of markets, technologies and economics, NexantECA provides solutions that our clients have relied upon for over 50 years.
