Last week, in what was another blockbuster week, oil prices rose further as the global energy supply tightness squeezed fuel availability. The temporary price relief from Thursday’s confusion over the possibility of releasing U.S. strategic reserves did not last long and prices quickly rebounded.

Louise Dickson

Asia, which is the prime candidate for increasing oil burning to produce electricity in the current environment, is also almost running out of coal, which is an extra bullish ping for traders, who then price in the general fuel tightness, adding froth to an already inflated oil price.

While the physical market is tight on supply, it doesn’t have to be this way. OPEC+ has more than 8.6 million bpd of crude oil spare capacity it can tap into and put on production within three-to-four months to quell the hot price run.

But the group is seemingly basking in higher prices, at least in the very short-term, depriving the market of the only supply cushion that exists. OPEC+ controls 95% of global crude oil spare capacity and there simply aren’t other sources to tap into to bring more of an equilibrium to the market.

If OPEC+ stays adherent to its 400,000 bpd tapering plan, the supply deficit will persist. There are other upside price risks that could further exacerbate the current imbalance.

Supply chain bottlenecks can add additional pressure, and higher interest rates could disincentivize borrowing and capital injection into upstream projects, which would extend the supply crunch into the medium term.

Finally, a faster-than-expected oil demand recovery will remain a decisive element in shaping the overall market outlook.

Road traffic continues to drive the oil demand recovery and has globally reached 95% of 2019 levels.

We believe it will normalize in 2022, but overall liquids demand will still remain shy of 100 million bpd in the fourth quarter as other products, primarily jet fuel and distillates, are not seeing the same demand spike as diesel and gasoline.

While gasoline and diesel demand are set to recover to 2019 levels during the fourth quarter of 2021, jet fuel consumption remains at 2.4 million bpd, 33%, below pre-pandemic volumes.

In some regions, where demand is particularly robust, we expect refineries to maximize utilization rates as gasoline and diesel demand return to pre-pandemic levels.

We already see this trend in U.S. refineries, but this trajectory will continue to feed the overhang build of jet fuel and other non-road fuels products, which will sooner or later weigh on margins and could force some refinery closures in mature markets.

Refinery closures could either cause regional tightness or expedite capacity addition in less mature markets.

Louise Dickson is the senior oil markets analyst for Rystad Energy.

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