Since the Russian invasion of Ukraine, global oil markets have been in turmoil. Several western countries including the US have imposed bans on buying Russian crude, which pushed up Brent prices. In addition, many oil companies are also abiding by the new import bans.
Oil prices continue to demonstrate volatility on the back of uncertain incremental supplies from outside of Russia.
The general market avoidance of Russian exports is likely to have a more immediate impact as an inability to find buyers will lead to logistical backups that will potentially require the shutdown of crude and product output.
Pipeline exports of crude, mainly on two lines, one to Europe (1.6 million barrels per day capacity) and the other to China (0.8 million barrels per day) via the Druzhba and ESPO lines should not be disrupted. These are contracted oil with banking arrangements not interrupted by financial payment impediments. This amounts to some 2.5 million barrels per day capacity, including other minor pipelines. Seaborne exports of crude amounting to another 2.5 million barrels per day capacity of exports, on the other hand, are more vulnerable, with mostly uncontracted spot sales.
Market estimates that some 2.5 million barrels per day of Russian crude oil and petroleum products (mostly gasoil) have been turned down look exaggerated given that inland pipelines to Europe and China have not seen downturns and tanker tracking indicates some 1.5 million barrels per day of seaborne exports have been reduced.
However, new developments started to prevail pushing prices down. Comments by Ukraine’s president that he might be ready to compromise on some of Russia’s cease-fire demands increased hopes that the war in Ukraine could end sooner than previously thought. Besides, markets are keeping a close eye on the talks with Iran on a new nuclear deal. A new Iran nuclear deal could see up to 1.5 million barrels per day of Iranian oil return to the market later this year. Adding downward pressure to prices the UAE’s indication that it would encourage other producers of the Organization of the Petroleum Exporting Countries to boost oil production. US officials have demanded Venezuela supply at least a portion of oil exports to the US as part of any agreement to ease oil-trading sanctions.
Intensifying sanctions on Russia’s oil sector could result in a slowdown of Russian oil production and a reduction in refinery throughputs.
China imported 10.5 million barrels per day of crude oil in January-February 2022, flat from levels in November-December in 2021. According to industry sources, Shandong independent refiners halting their purchases of Russian crude affected Chinese imports from Russia. However, Chinese state oil companies are expected to increase buying and absorb some of the heavily discounted barrels from the Black Sea and the Baltic. However, some doubt that since Chinese state oil companies are committed to long-term contracts. Overall, Russian oil to China could increase by 600,000 barrels per day in 2022 to reach 2.2 million barrels per day, freeing up barrels from the Arabian Gulf. Total Chinese imports are expected to remain flat at 10.2 million barrels per day.
Asia imported about 2 million barrels per day of crude from Russia in 2021, accounting for less than 5 percent of the regional imports. The majority of Russia’s crudes are bought by China, with half transported via pipelines. Although Asia’s direct impact from supply disruption of Russian crude will be less significant when compared to Europe, the expected reduction of Russian exports means Asia will have to compete with others to get its needed crudes.
The drive for record price level is tied to political tension and hence, once those reasons are cleared prices will fall back quickly. However, even with low liquidity, any positive outcome of the nuclear talks with Iran could push prices further down very quickly given that the supply impact of a new deal has probably not been fully priced-in. Further releases from strategic petroleum reserves also have the potential to push prices down.
The major crude spreads, Brent-WTI and Brent-Dubai, are expected to remain wide in the short-term and could potentially widen further with steep backwardation, which would put downward pressure on the demand for Brent-related crudes.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.
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