The rally on crude oil markets resumed an upward trend in May 2022 after a stall in April 2022, with major futures contracts ICE Brent and NYMEX WTI showed positive monthly dynamics four times in the last five months.
EXECUTIVE SUMMARY
The rally on crude oil markets resumed an upward trend in May 2022 after a stall in April 2022, with major futures contracts ICE Brent and NYMEX WTI showed positive monthly dynamics four times in the last five months. Crude oil prices were mainly driven by tightening oil product markets, near-term global crude supply risks amid continued geopolitical tensions in Europe, and the prospect of demand recovery in China after authorities started to gradually ease COVID-19-related lockdown measures, which could boost the country's oil demand. Signs of tight global gasoline and diesel supply ahead of the summer driving season along with a sharp decline in US gasoline and distillate stocks amid firm demand and slow supply growth from refiners have been supportive to the overall oil complex. The NYMEX WTI front month contract increased in May 2022 by 7.5% on a monthly average basis, while the ICE Brent first month contract rose within the month by 5.7% on the same basis to its highest level since last March 2022. Worries about further supply squeezing as the European Union banned Russian oil products imports added concerns about the potential for further tightening of middle distillate market fundamentals. Meanwhile, gasoline, gasoil and jet fuel exports from China were low in January-April 2022 as the country cut the first export quota for 2022, compared to the first 2021 quota.
However, volatility in the oil market remained elevated, specifically in the first half of the month, oscillating in the $10 range, as investors remained uncertain earlier in May 2022 about the extent of EU sanctions against Russian oil imports, and they sought to anticipate the EU’s decision. Selling pressure in global equity markets amid concerns over aggressive US monetary policy tightening, a jump in the US dollar’s value against a basket of other major currencies and overall concerns about an economic slowdown weighed on market sentiment and fuelled market volatility.
Crude oil prices extended their rally in late May and early June with ICE Brent's first-month contract hitting nearly $129 / bbl on June 10, 2022, as the EU decided to gradually ban Russia's crude oil and petroleum product imports amid an already tight global oil market. However, the rise in prices has been curbed by the prospects of rising crude oil supply from other producers in the coming months and the US Department of Energy's announcement offering to sell 40.1 mln bbl of crude oil as part of the US administration's announcement to release 1 mln bbl / d of oil for six months.
However, the market reversed to the downside during the second decade of the month with the ICE Brent front-month contract sinking below $120 / bbl on June 16, 2022 and heading for its first weekly decline since April 2022 as investors weigh the prospect of further monetary tightening from central banks to curb rampant inflation. This week, the Federal Reserve raised interest rates 75 basis points, the largest single hike in 28 years, as it sought to combat surging inflation, that is running at a 40-year high. Moreover, the US central bank signaled a willingness to accept a recession and a rise in unemployment in its resolve to contain elevated inflation. The decision was followed by surprise rate hikes from the Bank of England and the Swiss National Bank. But, notwithstanding a subsequent turmoil on equity and debt markets, the losses on the crude markets were limited, as traders appeared to again focus on tight oil supplies after the U.S. Treasury Department said it sanctioned a network of Iranian petrochemical producers as well as "front companies" in China and the U.A.E. that support companies which broker the sale of Iranian petrochemicals abroad.
All in all, only the ICE Brent front-month contract again showed a positive growth during the period under report, for the 6th consecutive month, though at a very humble pace, while the NYMEX WTI front-month contract moved even somewhat lower on the last day of the period. The ICE Brent active contract soared by just $0.57 / bbl in compare with the level of May 20, 2022, or +0.5%, to settle at $113.12 / bbl as of June 17, 2022. The NYMEX WTI near-month contract, conversely, declined within the period and lost $0.72 / bbl, or -0.7%, to sank to $109.56 / bbl as of June 17, 2022.
Total crude oil production of the OPEC increased in May 2022 by only 130 thsd bbl / d in compare to the month prior, according to Bloomberg’s estimates, though the OPEC+ agreed to ramp up its output by 432 thsd bbl / d during the month. Nevertheless, the total production of the OPEC kept on going up for 13 consequent months and fetched up in May 2022 its new maximal level since April 2020 of 28.85 mln bbl / d. Moreover, the output during the month was somewhat higher than the average level of last three pre-pandemic months (December 2019 – February 2020). In yearly terms, total crude oil output of the cartel again delivered a very strong expansion in May 2022, along with preceding months. The production built up in May 2022 by as much as 3.24 mln bbl / d relative to the level of a year ago, or +12.7% YoY, that is, however, a little bit slower than in the previous month. From a standpoint of an annual movement, in May 2022, the total crude oil output of the OPEC continued to grow over 13 months in a row. The most material monthly increase of crude oil production in the month under review was recorded in Nigeria, where the output sank down in April 2022 to the lowest volume in the course of last 5 years equal to 1.37 mln bbl / d. So, in May 2022, the production in the country restored by 120 thsd bbl / d by contrast to the April’s low, or solid +8.8% MoM. It was the most rapid monthly expansion of the output within previous 12 months. Meanwhile, the main cutback of crude oil production among all OPEC-participating states in May 2022 was again recorded in Libya, where the output proceeded to slide down a rapid pace for the third consequent month. This time, the production in the country lost another 140 thsd bbl / d relative to April 2022, or dramatic -15.6% MoM, the worst monthly drop of the output over previous 12 months. In result, the crude oil output in Libya sank in May 2022 to its lowest level throughout previous 1 year equal to 760 thsd bbl / d.
At the most recent 29th OPEC and non-OPEC Ministerial Meeting, which was held on June 2, 2022, the group agreed to speed up its supply cuts adjustment schedule further, pressed by rising fears of more tight restrictions on crude oil and petroleum product exports from Russia on behalf of European countries. So, OPEC+ reached an agreement to advance the planned overall production adjustment for the month of September and redistribute equally the 0.432 mln bbl / d production increase over the months of July and August 2022. Therefore, OPEC+ production will be adjusted in July 2022 upward by 0.648 mln bbl / d as per the attached schedule. Among other decision, the Meeting agreed to extend the compensation period until the end of December 2022 as requested by some underperforming countries. Also, the Meeting reiterated the critical importance of adhering to full conformity and to the compensation mechanism. The next 30th OPEC+ meeting is scheduled for June 30, 2022.
Total oil production worldwide improved somewhat in May 2022 after weak dynamics during the previous month, though crude oil imports from Russia remained lower than usual due sanctions imposed on the country by western states. The increase of the global output within the month under review was equal to 509 thsd bbl / d, or + 0.5% MoM. So, market fears regarding a sharp supply drop still haven’t materialized and the volume of the global oil output in May 2022 remained close to the upper border of the range of recent two years, at least according to the US DOE data. On an annual basis, the total production of oil around the world again was considerably higher in May 2022 than it was a year ago, but the speed of its annual expansion proceeded to decelerate, comparing to preceding months. As for the month under review, the yearly growth of the output was equal to 4.27 mln bbl / d, or +4.5% YoY, the 14th consequent month of global supply expansion on an annual basis. On a single country level, the strongest monthly expansion of production of oil, both in absolute and relative terms, in May 2022 was recorded in Brazil. Thus, the output in the country jumped by a sizeable amount of 556 thsd bbl / d in compare to the level of April 2022, or dramatic +15.6% MoM. In result, the volume of the production in Brazil outnumbered the threshold of 4.0 mln bbl / d for the first time over recent 8 months. Moreover, the rate of monthly expansion in May 2022 was equal to 2.19 SD of monthly growth rates over the whole history of observations. However, such a rapid monthly growth of oil production in Brazil to a certain extent was attributed to the seasonal pattern. Norway exhibited a formidable rise of its oil production in the month under review as for a monthly dynamic as well. The extraction of oil in this non-OPEC state built up modestly in May 2022 by 107 thsd bbl / d by contrast to April 2022, or solid +5.7% MoM. On the other hand, the most material monthly contraction of extraction of oil in the month under review was recorded in Canada. The output there reduced by 184 thsd bbl / d over the month, or -3.2% MoM. It was the third consequent month of oil production weakening in Canada. However, even more rapid monthly decline of the output in relative terms was observed in Malaysia. The output in this non-OPEC country tumbled severely in May 2022 by nearly 8.6% MoM, or -52 thsd bbl / d relative to the level of April 2022.
According to the weekly US DOE data, primary domestic oil production in the US, counted as the sum of crude oil and NGLs production, barely changed in May 2022 relative to the volume of the previous month and rose by just 29 thsd bbl / d, or +0.2% MoM, though the positive dynamics of the overall oil output in the country during the month was more pronounced. Nevertheless, the volume of the primary output in the US still remained close to its highest level over recent 2 years and the gap to the volume of the production in the last pre-pandemic month, namely February 2020, narrowed to 647 thsd bbl / d, though the overall oil production in the country has already surpassed the corresponding level during the month. However, on an annual basis, the primary domestic oil production in the US again delivered strongly positive dynamics in May 2022, along with preceding months. More exactly, it expanded by 2.19 mln bbl / d in compare to the one year ago level, or solid +14.4% YoY, the most rapid annual growth of the figure throughout recent 2 years. Also, the output continued to build up in yearly terms within 13 months in a row. The monthly expansion of the primary domestic oil production in the US in May 2022 was fueled solely by a growth of production of NGLs, while the output of crude oil in the country remained flat in May 2022 relative to the level of the previous month. To be more specific, the output of NGLs in the US demonstrated a certain strengthening within the month under review after two months of decline in a row and increased by 29 thsd bbl / d, or +0.5% MoM.
Total production of shale oil in the US continued expanding in May 2022 for the fourth month in a row and built up further by 184 thsd bbl / d in comparison with the volume of the previous month, or solid +2.1% MoM. In result of the profound monthly growth, the output reached its new highest level since March 2020, equal to 8.86 mln bbl / d. However, by contrast to the pre-pandemic level, the volume of the production in May 2022 was still nearly 460 thsd bbl / d lower. On an annual basis, the shale oil production in the US again demonstrated a much stronger expansion in May 2022, comparing to the monthly dynamics, along with preceding months. The annual growth of the output in the month under consideration was equal to 687 thsd bbl / d, or +8.4% YoY. In May 2022, the production proceeded growing in yearly terms over 13 consequent months. In absolute terms, the strongest monthly growth of the production in the month under review was observed on the deposit of Permian, which remained the main source of shale oil in the country. To be more precise, the output of shale oil on this field increased in May 2022 by 76 thsd bbl / d relative to the level of a month ago, or +1.4% MoM. In May 2022, the output of Permian field continued going up throughout consequent 1 quarter and climbed up to the new highest score ever equal to 5.38 mln bbl / d. A comparable in absolute terms, but much faster in relative terms monthly growth of shale oil production in May 2022 was registered on Bakken deposit. The output there demonstrated a build-up of 74 thsd bbl / d over the month, or impressive +8.2% MoM, the fastest monthly increase of the production for more than a year.
The International Energy Agency (IEA) released detailed statistics on consumption of crude oil and petroleum products around the world for the 1st quarter of 2022 during the period under report. Total consumption of crude oil and petroleum products around the globe in the first quarter of 2022 reversed to the downside after three quarters of expansion in a row and weakened by 1.89 mln bbl / d relative to the fourth quarter of 2021, or -1.9% QoQ, the worst quarterly performance of the figure for more than a year. In result, the volume of the consumption slid back below the threshold of 100.0 mln bbl that was outnumbered in the last quarter of 2021 for the first time since 2019 year. On an annual basis, total consumption of crude oil and oil products worldwide, on the contrary, continued to grow in the first quarter of 2022 and strengthened by 4.47 mln bbl / d in compare to the one year ago level, or +4.7% YoY. From a standpoint of an annual change, the demand ramped up throughout the 4th consequent quarter.
Under the most recent IEA monthly report, while higher prices and a weaker economic outlook are moderating consumption increases, a resurgent China will drive gains next year, with growth accelerating from 1.8 mln bbl / d in 2022 to 2.2 mln bbl / d in 2023. In contrast to 2022 when the OECD led the expansion, non-OECD economies are set to account for nearly 80% of growth next year. So, the IEA forecasts world oil demand to reach 101.6 mln bbl / d in 2023, surpassing pre-pandemic levels.
Total commercial stocks of crude oil and petroleum products in OECD states reversed to expansion in March 2022 after 13 consequent months of depletion and widened marginally by 2.9 mln bbl in contrast to the figure of the previous months, when it sank to the minimal print since March 2014, or +0.1% MoM. Despite to the positive monthly dynamics, the volume of the inventories in the month under review remained deep below the average and minimal levels for the corresponding month of a year over last 5 years. However, from an annual performance point of view, total commercial stocks of crude oil and petroleum products in OECD states again showed strongly negative performance in March 2022, along with several preceding months. To be more precise, the volume of the stockpiles tumbled in March 2022 by 292.7 mln bbl in compare to the one year ago level, or -10.0% YoY, a certain slowdown of the yearly decline, comparing to the previous month.
According the preliminary IEA assessments, following nearly two years of declines, observed global oil inventories increased further by 77 mln bbl in April 2022. Total commercial stocks of crude oil and petroleum products in the OECD also rose, by 42.5 mln bbl (or 1.42 mln bbl / d), helped by government stock releases of nearly 1 mln bbl / d. Staying at 2 669 mln bbl, the OECD total oil stocks were nevertheless 290.3 mln bbl below the 2017-2021 average. The early data for May 2022 show total OECD stocks building by another 6 mln bbl.
Total stockpiles of crude oil and petroleum products in the US continued to went down in May 2022 for the fourth consequent month and depleted by another 9.1 mln bbl in compare to the volume of April 2022, or -1.2% MoM. The inventories tumbled to their new record low throughout last 5 years equal to 740.1 mln bbl and, therefore, again remained well below the lower bound of the range for the corresponding month of a year for recent 5 years. On an annual basis, total inventories of crude oil and petroleum products in the US demonstrated a much more significant deterioration in May 2022, comparing to the monthly dynamics, along with preceding months, and dropped by a sizeable amount of 105.9 mln bbl, or serious -12.5% YoY. The inventories in the US kept on exhausting on an annual basis for 14 months in a row.
Crude oil inventories in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) reversed to the downside in May 2022 after two months of expansion in a row and dried up by 3.8 mln bbl in compare to the level of April 2022, or -13.2% MoM. Due to negative monthly dynamics, the volume of the stocks in the storage still has remained well below the lower border of the range for the corresponding month of a year over last 5 years. On an annual basis, the crude oil inventories in Cushing again showed a strong negative performance, along with previous months. The stocks tumbled in May 2022 by 20.5 mln bbl relative to the one year ago level, or shocking -45.0% YoY, a significant acceleration of the decline relative to the previous month. It was the 14th month in a row of Cushing stocks depletion in yearly terms.
Total floating inventories of crude oil worldwide reversed to the downside in May 2022 and declined moderately by 2.9 mln bbl relative to the level of April 2022, or -2.9% MoM. In result, the volume of the stocks returned back to the area below the threshold of 100.0 mln bbl. Despite to the negative monthly performance of the figure, the world floating crude oil stockpiles remained in May 2022 above the average level for the corresponding month of a year over last 5 years. Meanwhile, annual dynamics of total offshore stockpiles of crude oil around the world in May 2022 was positive after two consequent months of yearly expansion. So, the stocks widened by 6.0 mln bbl as against with the level of May 2021, or +6.5% YoY. It was the best performance of the figure in yearly terms for more than a year. The negative monthly dynamics of the overall global floating inventories of crude oil in May 2022 was attributed completely to a sharp drop of the stocks in Asia. To speak in numbers, floating stockpiles of crude oil in the region lost during the month under review 10.9 mln bbl relative to the month prior, or serious -16.4% MoM. It was the first monthly depletion of the inventories in the region in three months, but the volume of the stocks sank to its lowest level over recent 11 months of 55.4 mln bbl. On the other hand, the most formidable monthly rise of the volume of crude oil that held on floating storages in the month under review was showed in Europe. The floating inventories in this region jumped by 4.8 mln bbl in compare to the level of the preceding month that was equal to nearly +250% MoM.