Oil Climbs Another 3% as OPEC Paws Away Any Meaningful Output Hikes

© Reuters.

By Barani Krishnan — Shut out the noise, stick to the script and let consumers’ problems be consumers’ problems, not ours. OPEC+’s stance worked well in pushing crude prices up for a fourth day in a row, adding some 3% to Monday’s session after an initial tumble in the Asian trading hours as market participants reacted to poor economic data out of China, the world’s largest importer of oil.

London-traded settled at $114.24, up $2.9, or 2.4%. It sank to $109 earlier in the day.

New York-traded settled at $114.20, up $3.71, or 3.4%. Earlier in the session, WTI fell to as low as $106.28.

The turnaround in crude prices came after Saudi Arabia’s Energy Minister Abdulaziz bin Salman said a dearth of refining capacity in the United States and elsewhere meant that gasoline and other oil products would remain expensive even if exporters pumped more crude. 

US fuel prices have hit record highs since last week, with gasoline at above $4.50 and diesel at around $6 at some pumps. Aside from a deficit in refining capacity, demand for fuels anticipated ahead of the peak summer season for travel is driving energy prices to hitherto unseen levels. 

Abdulaziz’s remarks form a now familiar OPEC+ refrain that there are “physical impediments that no producer can solve.” 

The 23-state OPEC+, which comprises the original 13 nations led by the Riyadh-led Organization of the Petroleum Exporting Countries with another 10 countries steered by Russia, have stuck to monthly increases of just above 430,000 barrels per day. That falls clearly short of demand that is at least 3 million barrels higher, as a direct consequence of the West’s sanctions on Russia that have de-legitimized an equal number of barrels that used to be on the market.

The United States is experiencing a severe squeeze in the supply of gasoline, and particularly diesel, from the closure and downsizing of several refineries during the Covid-19 pandemic. Refineries that have stayed in the business are now providing only what they can — or, more accurately, what they desire — without putting any of the money into expanding existing capacity or acquiring the idled plants that can be reopened to provide some measurable relief to consumers. One motivation for the refineries to do this: record profits from the current situation that may be diluted in an expansion. The other is the long turn-around time for any new refinery to deliver a profit.

Bloomberg estimates that more than 1.0 million barrels per day of U.S. oil refining capacity — or about 5% overall — has shut since the Covid-19 outbreak initially decimated demand for oil in 2020. Outside of the United States, capacity has shrunk by 2.13 million additional barrels a day, energy consultancy Turner, Mason & Co says. The bottom line: With no expansion plans on the horizon, the squeeze is only going to worsen.

“There is no refining capacity commensurate with the current demand and the expectation of the demand in the summer,” Abdulaziz reiterated on Monday in comments carried by Bloomberg from an energy conference in Bahrain.

His remarks were echoed by Bahrain’s Oil Minister Sheikh Mohammed Bin Khalifa Bin Ahmed. 

“There’s no new capacity coming,” Sheikh Mohammed said at the same event. “Even if you produce more crude, there isn’t demand for it, there aren’t any more refineries.”

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