Global petroleum markets have become calm again after massive disruptions caused by the coronavirus pandemic, Russia’s invasion of Ukraine, and the sanctions imposed in response by the United States and its allies.
Production and consumption are growing at similar rates; inventories are near normal; prices are close to average once adjusted for inflation; and volatility is low – all signs the market has found an equilibrium after a tempestuous few years.
With a comfortable production-consumption balance, hedge funds and other speculators have scaled back oil positions to redeploy capital to more exciting markets in power, gas, metals and soft commodities.
It marks a sharp contrast to the start of the year, when most forecasters expected stocks of crude and fuels to deplete as OPEC+ extended production restraint and the major economies emerged from a slowdown in 2022/23.
But the anticipated drawdown has not materialized as stronger consumption growth has been met by faster-than-anticipated increases in crude output from the United States, Canada, Brazil, Guyana and some OPEC members.
The threat to global fuel supplies posed by Ukraine’s drone attacks on refineries in Russia, which peaked in the first quarter of the year, has receded after pressure from the United States to change the targeting program.
In the Middle East, fighting between Israel, Hamas, Iran and the Houthis has not disrupted crude production and tanker flows have been successfully re-routed to avoid attacks on shipping in the Red Sea.
Calm after the storms
So far in May, Brent prices have been around $83 per barrel, which is exactly in line with the inflation-adjusted average since 2000, so it is not sending a strong signal to either producers or consumers to change their behavior.
Reflecting the market calm, daily price moves have been unusually small, with annualized volatility declining to just 13%, in the 4th percentile for all overlapping periods since 1990.
Signaling a balanced market, U.S. commercial crude inventories are just 5 million barrels (-1%) below the prior ten-year seasonal average and the position has not altered significantly since the start of the year.
Combined U.S. stocks of gasoline, distillate fuel oil and jet fuel are only 14 million barrels (-4%) below the ten-year average and the deficit has narrowed since the start of the year.
The same calm has therefore settled over markets for refined fuels such as gasoline, diesel and heating oil.
Pump prices for gasoline including taxes have averaged $3.73 per gallon in May, only around 20 cents higher than the inflation-adjusted average since 2000.
Retail prices for diesel have averaged $3.82 this month, precisely in line with the inflation-adjusted average over the same period.
Speculators depart
Unsurprisingly, speculative investors have reduced their positions to deploy money more profitably elsewhere as they conclude prices are unlikely to move anywhere in the short term.
Hedge funds held a combined position across the six most important petroleum futures and options contracts equivalent to 380 million barrels on May 21, down from 685 million barrels six weeks earlier.
The combined position had been reduced to only the 16th percentile for all weeks since 2013 down from the 66th percentile on April 9.
Similar scaling back is evident across all the futures and options contracts for crude and fuels as fund managers slash their exposure to concentrate on more promising markets.
With oil settled into a period of calm, traders’ interest has shifted to other energy markets led by gas and power, still adapting to the aftermath of Russia’s invasion of Ukraine.
The focus has also shifted to industrial metals, where supplies have been stretched by rapid deployment of electric vehicles and grid upgrades as part of the transition to a future energy system.
