OPIS Insights

Watch: Barron’s Senior Energy Writer Laura Sanicola and OPIS Chief Oil Analyst Denton Cinquegrana discuss what’s ahead for energy this week.

This week’s episode examines why global oil prices remain elevated despite aggressive fuel conservation and “demand destruction” in Asia and Europe, efforts which have yet to offset the massive supply disruptions caused by the closure of the Strait of Hormuz.

Transcript:

LAURA SANICOLA: Hi, everyone. I’m Laura Sanicola, author of Barron’s Energy Insider, and I’m here today with Denton Cinquegrana, chief oil analyst at OPIS. Denton, thanks for joining.

DENTON CINQUEGRANA: Hey, Laura. How are you?

SANICOLA: Good. So as usual, it’s been a wild ride for crude oil.

It’s certainly the long-term trend now is very much inching up two to three percent today, despite whatever headlines are making their way, you know, across our TV screens or in the newspapers. What’s your take on where we’re at right now?

CINQUEGRANA: Yeah. It’s really more of the same as we, you know, kind of settle at some of the highest levels since the war began, particularly for WTI, which incidentally settled over Brent by about two dollars and fifty cents. That’s simply just a mismatch of months.

WTI is still trading May. Brent is June. If you compare the two June contracts, Brent’s back to about a twelve dollar premium. So that’s one thing that’s caught them a little bit of attention at least over the past, you know, kinda twenty-four hours. But, yeah, no changes. The strait remains closed despite, you know, the trickling of a few boats getting through, but it’s certainly not enough to offset the real loss of supply that we’ve seen really over the course of the past month.

SANICOLA: And demand destruction in Asia. And when we talk about demand destruction, we’re talking about switching from gas to coal or renewables. We’re talking about shortening the work week so that not as much transportation fuel is needed.

You know, all of that is starting to make an impact really, and they’re first because they’re more, you know, they they have more sensitivity to the loss of barrels in the Middle East. But, you know, is it closing the gap with the loss of supply or no?

CINQUEGRANA: I don’t necessarily think it is. It’s you know, again, with conservation and trying to save every drop, I’m sure it’s helping a little bit. But in the grand scheme of things, it’s not, you know, it’s helping a little bit. It’s not really kind of rebalancing everything.

Maybe getting a little bit more imbalanced, but not nearly enough. And, yeah, they’re in the conservation mode and save every drop they can. Like you said, switching from natural gas to coal, for example, for electricity production. But, yeah, they’re doing everything they can with trying to conserve in Asia because they’re most exposed to the Strait being closed.

SANICOLA: And what about Europe? Because, obviously, they have a very high price sensitivity as well despite being a bit further just by nature of being a major importer.

Have we seen that start to affect demand in Europe?

CINQUEGRANA: Yeah. Absolutely. And, obviously, more on the refined product side, more so than crude oil. But a perfect example is that some European airlines are reducing capacity this summer because of the high jet fuel price. And one thing that’s happened that’s, you know, kind of made it through the shipping logs recently is there were two cargoes of jet fuel going from the United States, from the US East Coast, from the New York Harbor to Europe. That’s rare.

And then over the last couple days, we’ve seen three cargoes of diesel going from the New York Harbor to Europe as well. Again, these are kinda rare trips, so it’s something to keep an eye on. And when it comes to gasoline, the US East Coast is normally an importer of gasoline. But this past week, according to the EIA, we only saw ninety-nine thousand barrels a day come in, so about seven hundred thousand barrels for the week. During the depths of COVID, the lowest import rate was one hundred sixty-one thousand barrels a day. So clearly, gasoline that is normally destined for the East Coast is going elsewhere.

SANICOLA: Well, still good news for US refiners. And, you know, speaking of the US, we’re sort of the last likely to experience true demand destruction just because of our geographic location and a number of elements related to our supply chain. Are we starting to see demand destruction in the US yet, and what would that take?

CINQUEGRANA: Yeah. Not quite yet.

We mentioned that the EIA, and gasoline demand looked like it was holding up based on their metrics. Same for diesel demand, distillate demand. But even our survey of about thirty-five thousand stations throughout the US, we saw gasoline demand moving up week on week. So, again, I think the American driver is in tune to watching what’s happening with the price of oil and are trying to get ahead of price moves. So I think, obviously, the consumer has become very smart. But, also, you know, we got above four dollars a gallon. We haven’t been above there long enough to really kinda make inroads for demand destruction when it comes to gasoline demand.

SANICOLA: Alright. And, of course, again, we’d still have to tally all of that up against the loss of, you know, what is it, ten million barrels per day of supply being disrupted at least? It’s a pretty tall order to ask globally, without a COVID-type situation.

CINQUEGRANA: Yeah. That’s right.

SANICOLA: Alright. Well, we’ll keep monitoring, and, we’ll see everybody next week with more updates.