Although not rising today, oil prices continue to thrive on the momentum of supply constraints in the U.S. Gulf of Mexico, which was reflected in the large crude inventory draws report of last week.
While oil production is slowly returning, there are still prolonged outages that may last into early next year, supporting a bullish sentiment as some of the expected supply in coming months now will be removed from the equation.
Shell’s reopening of the Amberjack pipeline, which sends Mars crude to the Louisiana coast, will allow some production to return to the market. But the delay in getting the Delta 143 platform back online (Shell estimates that the WD-143 "A" platform facilities will be offline for repairs until the end of 2021), a key junction between the Mars, Olympus, and Ursa platforms, will translate into outages of around 200,000 bpd going into 2022 and provide ample price upside in the very near-term.
Supply-side constraints are paired with seemingly bullish signals for higher oil demand in the short-term, both on the back of potential oil-to-gas switching as natural gas prices skyrocket, and as some countries, in particular the U.S., loosen travel restrictions.
Record high natural gas prices could create oil demand opportunities, as fuel oil and gasoil are being considered as a substitute for natural gas in power generation at select plants with such switching capabilities.
The U.S. lifting of its ban on foreign visitors will provide upside support to jet fuel in the short-term and in the holiday season but a full normalization in aviation travel is not expected globally until 2024, and thus jet fuel will remain the Achilles heel in oil consumption recovery.
While crude market fundamentals remain tight, there is still substantive oversupply in the liquids market, indicating that the bull run in crude prices will at some point have to reckon with the imbalance in oil products, and prices are expected to lower as we move into 2021’s fourth quarter.
Louise Dickson is the senior oil markets analyst for Rystad Energy.