Key Analysis Sees Red Sea Shipping Diversions Starting To Boost Oil Demand

The IEA's report for March, released Thursday, sees increased demand for bunker fuel–the fuel that is used to power ships– because the diversions prompted by Houthi attacks on cargo vessels are now having a measurable impact on demand. That factor, combined with what the IEA said is solid demand growth from the U.S., led the agency to increase its closely watched supply/demand estimate for 2024 to reflect almost 120,000 barrels per day more demand than it forecast just one month ago.

In February, the IEA projected that global demand for petroleum in 2024 would be 103 million barrels a day. A month later, that forecast is up to 103.18 million.

The IEA's current estimate for 2023 is that the world consumed 101.84 million barrels a day. That number is subject to revision as more data comes in.

The estimated year-on-year demand increase for the first quarter is a big reason for increasing the estimate of the projected first-quarter and full-year demand increase.

Global demand in the first quarter of 2024 is expected to be about 1.7 million barrels a day greater than it was in the first quarter of 2023, just over 102 million versus just over 100 million. That pace of higher first-quarter consumption is above the 1.34 million barrels a day now projected for a full-year increase in global demand.

Singapore numbers show the strength in bunker demand

Shipping demand for the longer voyages avoiding the Red Sea and Suez Canal is a key reason for the increased estimates. "As shipping diversions look set to continue for the foreseeable future, we have raised our 2024 bunkering outlook, principally for Singapore," the IEA said.

Measuring bunker fuel demand has always been one of the more challenging tasks for supply/demand analysts because of the diffuse nature of so many locations where bunkering can take place.

The IEA, in its higher estimates on global demand led in part by bunkering, appears to be drawing heavily from Singapore data, which is transparent and according to the IEA accounts for about 25% of global bunker demand.

The IEA said 3,751 vessels bunkered in Singapore in January, an all-time high. "The Red Sea crisis [is transforming] global maritime traffic," the agency said. "Ships avoiding the Suez Canal are taking longer journeys around the Cape of Good Hope, while efforts to make up time by sailing at increased speed act as an additional boost to fuel consumption."

But while all other ports supply smaller volumes than Singapore — the report said Rotterdam, Netherlands, is second at about a quarter of Singapore's supply — data suggested they weren't all following Singapore's surge.

Bunker sales at Rotterdam were down 26% year on year in the fourth quarter, the most recent data available, but that was before the Red Sea diversions began in earnest. 

But sales at Fujairah, United Arab Emirates, were up 6% year on year in January. Sales in Panama that month were their lowest in three years, the IEA said, owing to the curtailment of Panama Canal traffic brought about by drought-related low water levels.

One of the biggest impacts of the Red Sea diversions is the increase in inventories under a category known as Oil on Water, which are what they sound like: oil that is on ships in transit or being stored on a tanker. Those totals increased 115 million barrels since the middle of last year, according to the IEA, and much of that came last month.

"Oil on water [in February] surged by 85 million barrels as repeated tanker attacks in the Red Sea diverted more cargoes around the Cape of Good Hope," the IEA said. "At nearly 1.9 billion barrels as of end-February, oil on water hit its second highest level since the height of the Covid-19 pandemic."

The overall projected increase in residual fuel consumption this year, 95% of which is bunkering, according to the IEA, is 212,000 barrels a day. The impact of bunkering on that number can be seen by the fact that besides jet fuel, consumption of middle distillates — mostly diesel — is expected to rise just 230,000 barrels a day, even though middle distillate consumption is about four times that of residual fuel. 

Although physical markets for diesel in the U.S. have not notably tightened, as evidenced by the spread between ultra low sulfur diesel on the CME commodity exchange and physical barrels in such markets as the Gulf Coast, the IEA said it saw strong fundamentals for European diesel.

That will likely encourage refineries in Europe to produce as much diesel as they can, the IEA said. "In the short term, tight European product stocks, most notably for middle distillates, increase the chance that the region's refineries will continue to benefit from healthy middle distillate cracks as Europe remains heavily reliant on imports from sources East of Suez," the IEA said. "The prolonged disruption to global trade flows, and the current need to sail via the Cape of Good Hope, will likely support European diesel and jet fuel cracks in the coming months."

U.S. helping to drive demand

In raising its growth forecasts for higher consumption in the first quarter and the full year, the IEA did not rely solely on bunker fuel. The forecasts are also driven by its estimate of U.S. consumption, as it gave a strong review of the American economy.

But the U.S. outlook wasn't just for transportation fuels. The agency said U.S. demand has been boosted by "extremely strong" deliveries of ethane, which is used as a petrochemical feedstock.

U.S. output of ethane, which is used to make ethylene that in turn is a basic feedstock in petrochemical operations, was 2.612 million barrels a day in December, the most recent month for which data is available. Five years ago, in November 2018, that output was 1.73 million barrels a day.

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