Oil weighed down by surplus of fuels while demand inches back

Oil traded near $38 a barrel in New York, joining a retreat in risk assets such as equities as investors weighed lingering economic worries against prospects of a rebalancing market.

Crude has rebounded since dropping below zero in April as output cuts by the OPEC+ producer alliance reduced a global glut and demand picked up following the easing of lockdown restrictions in some countries. However, with a surplus of fuels—most notably diesel—swamping the market, Goldman Sachs Group Inc. has turned bearish on oil in the short term due to poor returns from refining.

“The weight of the relative value of distillate is slowing a price advance,” said Tom Finlon of Houston, Texas-based GF International.

Additionally, the dollar halted its longest losing run in almost a decade, reducing the appeal of commodities priced in the greenback.

Refineries—particularly in Europe and the U.S.—are trying to make as little jet fuel as possible because demand from the aviation industry still remains far below where it was before the pandemic struck. And that means producing more diesel. Similarly, refineries cannot meet a recovery in gasoline consumption without boosting their overall processing rates—and that too brings more diesel.

U.S. crude inventories are forecast to decline for a second week, ahead of industry figures due to be released later Tuesday, and Canadian bank RBC said the market is tightening four to six weeks sooner than expected.

“OPEC+ cuts and supply curtailments in other places like the U.S. are doing much of the heavy lifting,” RBC said in a report.

Saudi Arabia decided to end additional supply curbs this month, and that means the cartel’s total supply reduction this month of almost 11 million barrels a day will taper gradually in the coming months.

In Libya, the country’s largest field was said to restart after a brief halt, according to people with knowledge of the matter. The nation’s National Oil Company had earlier declared force majeure on exports of Sharara crude, just three days after the field restarted.

“Libya has had a number of false starts in the past,” Finlon said. “You have to be a little leery until production actually materializes,” he said.

Meanwhile, Iraq has asked some Asian refiners to consider forgoing prompt shipments of its Basrah crude, raising speculation that OPEC’s second-biggest producer is trying to comply with pledged output cuts. The country and some others were recently pulled up by Saudi Arabia and Russia for pumping above their quotas.