Analysis: Oil benchmarks pause; await more evidence of physical oil market rebalancing

London — The physical oil market is walking a tightrope between the momentum spurred by the surprise Saudi Arabian cuts and the pressure of renewed lockdowns in many countries, which is keeping a lid on demand.

The big concern emerging is the worrying uptick in COVID-19 cases in some Chinese cities, as the Asian powerhouse drove the oil market's turnaround in the latter half of 2020.

The Platts Dated Brent benchmark has fallen almost $1.50/b after it climbed to an 11-month high of $56.12/b on Jan. 12.

Recent events led Goldman Sachs to boost its Brent crude forecast to $65/b by mid-2021, up to six months earlier than previously forecast, while S&P Global Platts Analytics still expects Dated Brent to be in the low to mid-$50s/b for much of 2021.

Despite analysts and oil forecasters upwardly revising their 2021 oil price and demand outlooks, oil watchers are waiting for further directional cues in the physical market.

Asian demand for March-loading barrels has started off slow as some of the region's key refineries enter their spring turnaround season.

This can be seen by the fall in Chinese demand for West African crudes but demand for Middle Eastern oil has so far proven largely resilient.

But the crude market in the Atlantic Basin is looking balanced with a substantial length of North Sea crudes clearing in the past week.

Exports of US crudes like WTI Midland into Europe have also slowed down, which has provided some support.

With US production expected to decline further in 2021, and with refinery runs recovering, Platts Analytics expects US crude exports to fall early in 2021 and remain subdued through the year compared with 2019 and 2020 levels.

Sturdy product complex

Despite lockdown measures across Europe, regional refinery crude buying demand has improved, alongside strengthening product cracks.

Lighter sweeter crudes were seeing more appetite, with short supply concerns heard in distillates markets, paired with tighter supply of naphtha.

Distillate markets have remained relatively supported amid lockdown measures, as low supply continues to somewhat balance low demand.

The working-from-home effect has been a big plus for the trucking sector, and this has bolstered diesel demand in recent months.

A switch in consumption from services to goods has contributed to an online shopping boom, which has provided a boost to this industry.

Naphtha continues to draw a lot of strength from robust petrochemicals demand, which has tightened supplies.

The Northwest European naphtha crack spread against Brent crude oil has been hovering at more than three-year highs of $1/b, according to S&P Global Platts data.

Naphtha generally trades at negative crack spreads as refiners target a maximization of the yields of premium fuels -- diesel or gasoline.

European gasoline prices have retreated after a brief rally weighed down by lockdown restrictions across Europe. But the gasoline crack spread has strengthened to three-month highs of $3.50/mt in the week started Jan. 17 as supply remains largely balanced.

Stock draws

Amid this backdrop, crude oil stocks have continued to descend from the 2020 spring-summer peaks but remain above pre COVID-19 levels.

Commercial oil stocks in Organization for Economic Cooperation and Development countries fell in November 2020 for the fourth consecutive month at 3.1 billion barrels, according to data gathered by the International Energy Agency. This is now just a little above the five-year average of 2.9 billion barrels.

Other Platts datasets also point to the momentum shift: floating storage is down at near 11-month lows, and crude and products are being pulled out of onshore storage.

But Platts Analytics cautions that compared with historical averages, jet, diesel and crude stocks remain "very high" while gasoline and high sulfur fuel oil are "less elevated."

The oil market, after a 30% rise since November, is once again at a crossroad. China demand and Saudi Arabian supply is likely to continue shaping the journey ahead.