Oil prices gains continue on Monday with the Brent Crude advised by an analyst on how to reach the $40 to $50 per barrel crude price hope.
The continued oil prices rise was expected to pause due to the announcement made by OPEC and its allies on extension of supply cuts by 9.6 million barrels per day until the end of July.
The recent move increases the hope for oil prices’ bull run after the virus outbreak cut demand which eventually led to price fall.
However, data from refineries across several regions shows weak margins, or “crack spreads” — the difference between the price of crude that refiners buy versus the price that the market is paying for the refined products.
Higher crude costs without increased returns for the products refineries are selling suggests demand growth isn’t in line with the growth in prices, and could force refineries to buy lower crude volumes, translating into lower crude prices.
Very poor refining margins and the recent sharp decline in U.S. crude bases now comfort us in our sequentially bearish outlook.
“One word of caution is if we look at the rally we’ve seen in crude oil prices, it’s been amazing, but the big uncertainty is if you look at refinery margins, they are very weak across the board across all regions,” Warren Patterson, head of commodities strategy at ING, said.
“And what that suggests is that maybe demand isn’t recovering as quickly as many had anticipated, or at least it’s not keeping up with the move higher that we’ve seen in crude oil prices.”
The crack spread for refined products in the US was at $9 last week, compared to $21 at the same time last year, Reuters reported, citing Refinitiv Eikon data.
Margins for European diesel reached a record low of $2.90 per barrel last week.
“Very poor refining margins and the recent sharp decline in U.S. crude bases now comfort us in our sequentially bearish outlook,” analysts at Goldman Sachs stated this week. They forecast Brent would pull back to $35 per barrel in the coming weeks, compared to spot prices at $43.
Soon to pressure refineries further is Saudi Aramco’s announcement over the weekend that it is raising official selling prices for all of its customers in July, and for some the highest increases in 20 years.
Saudi selling prices will spike next month by $5 to $7 per barrel just for Asian buyers, for instance — “again further hitting refining margins,” Patterson said.
What refineries need is for the demand side to match up with the steady revival of crude prices, expected to gradually improve as economies reopen and lift their lockdowns meant to stem the spread of coronavirus.
“Refiners are facing weak cracks (margins) at the moment and the current pick-up in crude prices will only make them worse,” said Edward Bell, commodity analyst at Dubai-based bank Emirates NBD.
“If there isn’t an improvement in refining margins, based on demand improving across the barrel then we would expect to see refiners pushing back on volumes and that feed back into lower crude prices.”