There are more variables at play than ever before as analysts try to determine where oil markets head next, and whether gasoline prices climb even higher this summer.
Two new factors they’re having to contend with: a flip-flop in the way that international crude oil prices trade versus U.S. crude, and a newly prominent role for India in how crude is processed and transported. Alone, neither factor will be the prime determinant in where the market goes next. But at the margins, they matter for most of the companies in the
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The first factor that’s roiling markets is a change in the way that international oil trades. For several years, West Texas Intermediate crude, the U.S. benchmark price, has traded at a significant discount to Brent crude, the international price. It just became more expensive. On Wednesday WTI futures were down 0.7% to $111.66 per barrel and Brent was down 0.7% to $111.15. A year ago, Brent was at $68.71 and WTI was at $65.49.
One key reason Brent traded for more money was that it’s easier to send around the world. Brent, which trades in the North Sea, is easier to transport. West Texas oil is delivered at a pipeline hub in Oklahoma. As U.S. production has risen because of the shale revolution, much of that oil has remained landlocked without access to international buyers who might pay a premium for it.
A few things have changed. A growing amount of crude is now exported from the U.S., thanks to improved infrastructure for shipping, so crude-sellers can sell to more customers. And U.S. refiners are buying more crude than usual, because they’re making record sums by refining it into fuels. More people in the U.S. are traveling as Covid-19 restrictions end, so fuel demand is on the rise. Meanwhile, Russia has been making less fuel as sanctions have impacted where it can export that fuel, so the U.S. has been replacing some of the lost supply.
At the same time, Brent prices have been held down by several factors having to do with international politics and economics. The EU has not been able to come to agreement on a ban on Russian oil–the possibility of a ban had previously caused prices to rise, and a delay in approving that ban has caused them to drop back down. In addition, international issues like Covid lockdowns in China “may weigh more heavily on Brent, further compressing the spread,” wrote Lisa Orme and oil analyst at S&P Global Commodity Insights, in an email to Barron’s.
It’s still hard to determine what this means for the longer-term trend in prices. If WTI stays high because of strong demand it would lift prices. But if it’s only higher because Brent is weak, then the price signal isn’t as strong. At the very least, it means that oil investors should expect more volatility ahead as these trends either persist or reverse. The oil market’s familiar patterns are quickly fading.
One other dynamic that’s changed is the role of India. Historically, India has not been a major player in the oil market, at least on the production side (it ranks third for consumption). The country produces about one million barrels a day, leaving it out of the top 10 for producers. But India has significant refining capacity, and is able to produce about five million barrels per day of fuels and other petroleum products. As other countries have shunned Russian crude oil, India has been buying it, according to RBC Capital Markets analyst Michael Tran.
In fact, India has been importing about 700,000 more barrels of Russian crude—which trades at discounted prices on the international market—than it was before the invasion. “India is firing on all cylinders,” Tran wrote. “Crude imports and domestic product demand are registering new highs. As mentioned, India product exports are near all-time highs at nearly 3.4 million barrels a day as refiners take advantage of the massive Russian crude discount and the enormous margins amid the growing holes and reshuffling of the global product export market.”
India’s willingness to buy Russian crude—and Europe’s willingness to keep buying the products made from Russian crude—blunts the impact of sanctions, and weakens attempts by other countries to isolate Russia diplomatically. But it does appear to be helping India economically. And it may also impact U.S. companies that are competing to send refined products to Europe.
“India’s seemingly relentless buying of Russian crude is coming at the expense of the US barrel,” Tran wrote. “India boxed out US crude exports, pushing flows down roughly 50% for March and April compared to 2021 levels.”
For now, U.S. producers like
) are enjoying strong revenues from high crude prices, and refiners like
(MPC) are making very strong margins, so competition from India doesn’t hurt them much. But if this dynamic continues, it could impact U.S. companies more, and potentially weigh on margins in the future.