Barclays Capital estimated on Monday that the ash cloud could be responsible for cutting up to 1m barrels a day of demand in the short term.
But while that might sound a significant sum, Barclays said it still was not enough to have a significant impact on the actual oil market balance.
In the analysts’ opinion:
Having recovered after some brief weakness earlier this week, crude oil prices settled lower on the week, pressurised by a resurgence of financial worries and potential qualms about the losses of jet fuel demand arising from the volcanic eruption in Iceland.
Front-month WTI lost 2% on the week to $83.24/bbl, while the equivalent Brent contract outperformed, actually rising by 1.37% w/w to $85.99/bbl, though it came in the firing line on Friday nonetheless. On Friday, May WTI fell by $2.27, while the June Brent contract lost $1.18 to $85.99/bbl.
However, the heavy losses at the end of the week were primarily concentrated at the front of the curve, thereby widening the contango for both the benchmarks, and highlights, in our view, that the correction is a short-term aberration, rather than a change in the norm.
In our view, the impact of the current losses in jet fuel demand is too meagre to have any meaningful effect on annual oil market balances.
European jet fuel demand totals about 1.1-1.2 mb/d. With two-thirds of flights cancelled, this amounts to roughly 700 thousand b/d, and even including a very generous allowance for the rest of the world (from where flights to Europe have been cancelled), this total would rise to just about 1 mb/d.
In a global oil market of 85 mb/d, the disruption so far is likely to have limited consequence on an annual basis, especially if one puts this into perspective of the widely divergent views on European oil demand projections in 2010 that already exist.
At the one end of that range is the DOE, which is forecasting a fall in European oil demand of just 0.04 mb/d, while at the other end, we are forecasting a more substantial fall of 0.52 mb/d – a divergence of 0.48 mb/d.
Of course, sustained over a few weeks, the cumulative effect might just be noticeable in global balances (though there is also likely to be some catch-up in demand once normalcy resumes), but at the moment, the stark differences in consensus estimates of European oil demand stands out more than the possible impact of the volcanic eruption on global oil demand annually.
Overall, we do not see recent events as changing our views on the oil market, and we retain our views on our global balances and price forecasts for the year, in that the physical crude oil market is headed towards tightening, on the back of rampant non-OECD oil demand growth and commensurate draws in global crude oil inventories bringing the vastly reduced overhang to normal levels.
Flights outlook gives jet fuel a bumpy ride – FT
Volcano ash creates potential for yet more refining gloom – FT Energy Source
Icelandic volcano ash and the eurozone, a primer from RBS – FT Alphaville
BA versus the volcano – FT Alphaville