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Oil Market
Ahead of the key summer driving season, Brent risks may still be skewed to the upside as the
$120 a barrel (as of May 30) level is tested, with China lockdowns gradually easing and a tight
physical market. Beyond the recent China overhang, fundamentals are strong given OPEC+
supply shortfalls, low inventories, and declining spare capacity.
Catalysts for Price of oil:
 Potential Upside Catalysts:

o Most OPEC nations struggling to increase output
o EU embargo on oil from Russia, deeper sanctions, more disruption
o Summer driving season, strong products demand, low inventories
o Easing air-travel restrictions
o Geopolitical factors
o Unexpected outages
o Dollar weakness
 Potential Downside Catalysts:
o Lockdowns in China amid zero-covid policy limiting demand
o Global strategic reserve releases
o Easing of geopolitical tensions
o Return of Iran barrels if new nuclear deal is reached
o Stronger-than-expected non-OPEC output growth (e.g., US Shale)
Pressure is mounting on countries to introduce deeper and stronger sanctions against Russia,
including oil and gas from the country, potentially adding to oil-flow disruption and supporting
prices. Meanwhile, OPEC+'s output hikes may continue to fall short of plans for 432,000 barrels
a day, with most member nations struggling to boost production in-line with rising targets.
Combined, these supply-driven catalysts adding to already bullish oil sentiment -- with the Brent
forward curve still heavily backwardated.
Pandemic restrictions in China (albeit easing), the release of strategic reserves and weakness
in wider global markets may pressure near-term prices. Yet the full lifting of lockdowns in China,
the summer driving season and strong demand for oil products should in turn provide support in
coming months.
Oil Demand in 2022 Seen Above Pre-Pandemic Level by Majority
The omicron variant appears to have boosted near-term concerns about oil demand, 60% of
Bloomberg survey think global demand will exceed 100 million barrels a day (mmbpd) on
average this year. By comparison, the International Energy Agency's latest forecast is for
demand of 96.3 mmbpd in 2021 and 99.7 mmbpd in 2022. About 35% of those surveyed see
demand of 98-100 mmbpd in 2022, with a small minority expecting it to be below 98 mmbpd.
A potential recovery in jet-fuel demand (roughly 8% of the pre-pandemic total) could help tip
global use above its pre-pandemic level in 2022, particularly on an easing of summer-travel
restrictions.
More than 70% of the respondents Bloomberg survey see oil demand peaking by 2035,
representing an outward shift compared with the results if Bloomberg’s poll in March 2021,
when about two-thirds of those surveyed predicted a 2030 high. The resurgence -- following
lows touched in 2Q20 --may be driving more bullish expectations for near-term growth. Yet as
climate policies proliferate, it’s seen the potential for a reversal. In the U.K., for example, plans
to ban the sale of new gasoline and diesel automobiles by 2030 could dent the transportation
segment's oil needs by about 15% in 2025 vs. 2019's level.
Corroborating this view, Fatih Birol, the head of the International Energy Agency, recently
commented that global oil demand could peak by 2025, assuming the goals discussed at the
COP26climate conference in Glasgow are met.
Refining Industry
The global oil refining system may not have enough spare capacity to meet fuel demand
recovery into the peak northern hemisphere summer season. Robust consumption recovery has
compounded market imbalances from avoidance of Russian products, causing gasoline crack to
follow diesel's trajectory to a record high and opening up arbitrage opportunities globally.
Gasoline Crack Rally Backed by Solid Demand
The global oil refining market could remain in structural shortage through 2023 following a wave
of refinery closures over the past 2 years and declining supply from Russia and China. Gasoline
is following diesel's earlier trajectory as Asian crack spreads against Dubai crude climbed to a
record on May 20 of $38.5 a barrel. Robust demand may have caught refineries and traders off
guard, as the global economy gradually opens up to a post-pandemic scenario. US vehicle
mileage data suggests March demand was 2% above 2019's level, and this recovery could
extend into the northern hemisphere summer driving season. India also reported strong growth,
with April consumption 14% above 2019's level.
Limited Spare Global Refining Capacity
The oil refining system lacks spare capacity to meet consumption-demand recovery, and with
global refining capacity utilization for 2022 at 82%, similar to pre-pandemic levels in 2019. Yet
the effective utilization rate, excluding Russia and China is about 86%. Any potential disruptions
to supply could send crack spreads higher. Petronas' refinery faced trouble in restarting while
fire at S-Oil's RFCC unit on May 20 adds uncertainty to gasoline supply.
Asian complex refiners such as Formosa, SK Innovation, S-Oil and Thai Oil could be major
beneficiaries amid market shortage. Their product yields -- around 20% gasoline and 50% mid-
distillate -- plus deregulated market prices allow them to capture widening crack spreads.
Rapid Inventory Drawdown Stresses Refinery System
Depleted refined oil-product inventory across the world tests the global refinery system's
capability to meet the summer-peak driving demand. US gasoline stock declined rapidly over
the past month but local refineries' utilization may be constrained by the lack of intermediate
feedstocks which were previously supplied by Russia. Europe's light distillate stock is also
dropping, partly due to arbitrage flows to US East Coast, while Asia stock has yet to decline.
Middle-distillates inventory across the world remained near historical lows. Reduced supply from
Russia and China was a major cause for inventory drawdown, while a rebound of air travel and
jet fuel consumption compounded market imbalances.
Volatile Diesel Arbitrage Window

Global energy companies and traders avoiding Russian energy products caused disruptions to
regular trade flows and contributed to volatile arbitrage economics. The Gasoil East-West First-
Month Swaps (EFS) was $2 a barrel on May 23, up from a record low on March 3 of negative
$98.75 a barrel. This suggests the gasoil arbitrage window between Singapore and Europe is
closed at the moment, but uncertain supplies from Russia may flip the index again. On gasoline,
tight supplies in the US are pulling volumes from Europe and Asia, particularly India.

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 Potential Upside Catalysts:

Volatile Diesel Arbitrage Window

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