The price of Brent crude ended the week at $112.67 after closing the previous week at $118.11. The price of WTI ended the week at $109.33 after closing the previous week at $115.68.
Oil prices are in a period of heightened volatility with the market reacting and over-reacting to news flow. Last week, oil prices fell sharply with the UAE indicating that it was supportive of increasing oil supplies beyond the current OPEC+ agreement. Later the UAE walked backed the statement, and a representative from Iraq indicated that the current supply from OPEC+ was adequate for the market. However, the situation remains uncertain, and the future direction of oil prices is dependent on many factors – including those factors which will provide upward support for oil prices, and those factors which will put downward pressure on oil prices.
To help replace the potential missing barrels from Russia, the Biden Administration is reaching out to members of OPEC+, most notably UAE and Saudi Arabia, which have spare capacity that could support bringing on additional oil supply almost immediately. While the UAE indicated some openness to increase supply (with the caveat that any additional supply would need to be in accordance with other members of OPEC+). Saudi Arabia seems less open to the idea. The relationship between the US and Saudi Arabia is currently at a low point because of disagreements pertaining to the Iran nuclear deal and the reduced US support for Saudi Arabia with respect to its ongoing conflict with Yemen and the Houthis. The next OPEC+ meeting is scheduled for March 31. The Biden Administration has also reached out to Venezuela. However, even if the negotiations lead somewhere, Venezuela’s oil sector is in no shape to bring on additional supply in a meaningful way in the near term.
The nuclear talks continue with Iran, but we remain skeptical that an agreement will be reached anytime soon. The previous week, Russia asked for a written guarantee from the US that Russia would be allowed to continue trading, investing, and cooperating with Iran without any barriers from sanctions. Over the week, Iran undertook a missile attack in northern Iraq. Apparently, the attack was in response to an Israeli airstrike in Syria that killed two commanders in the Islamic Revolutionary Guard Corps. Furthermore, the US took no casualties, and it seems that the Biden Administration is downplaying the attack stating that the US was not the intended target. Regardless, such an attack makes the task of selling the agreement to the US public more difficult. Additionally, in our view, the biggest hurdle remains that Iran is demanding guarantees that the US will not walk away from the agreement again, but the Biden Administration can’t provide that guarantee without a formal treaty, which will require two-thirds approval from the US Senate. Without a formal treaty, the next administration can reverse course, as did the Trump Administration. This requirement was highlighted by a group of 33 Republican Senators warning President Biden that they would not support any agreement that did not involve Congress reviewing and voting on the terms. The Russia-Ukraine conflict is only going to harden the Republican opposition.
Therefore, the ability to replace “missing” barrels from Russia will be highly dependent on the extent and effectiveness of the sanctions – mandatory and voluntary. So far, the seaborn loadings of oil and oil products from Russia continue. Crude and product shipments associated with the Black Sea and the Baltic have remained consistent with the volumes prior to the start of the conflict. The big difference is shipping costs have increased significantly, in part, because of less tankers (approximately 20% less) operating in the two areas. To facilitate exports to Asia, Russia is foregoing the requirement for letters of credit from Chinese banks. Additionally, Russia is offering its crude at steep discounts. At the end of last week, the price of ESPO was $90.23 in comparison to $112.09 for DME Oman crude. The major western trading houses are also continuing to make transactions for Russian crude oil and oil products, along with other commodities.
While the expectations for additional supply from OPEC+, Iran and Venezuela are slim, at least for now, Russia is still able to move exports of crude and oil products at levels like those prior to the start of the Russia-Ukraine conflict. However, the risk remains that sanctions could tighten the longer the conflict goes on.
Negotiations between Russia and Ukraine have been taking place and have generated positive news over the weekend with representatives from Ukraine, Russia and the US indicating that progress has been made. The Russian representative indicated that progress was so substantial that documents could be ready to be signed in days. While the negotiations are going on, however, it appears that the conflict has entered a new phase with Russia expanding its military actions and the west moving more military equipment into the conflict. In response, Russia launched ballistic missiles at the Yavoriv military training center near Poland, which had recently been used by NATO in the training of Ukrainian military. Furthermore, if the situation worsens, it is possible that Russia will limit sales of oil to the west.
Oil demand will be negatively affected by elevated oil prices, but prices will need to move closer to $145.00 to have significant impact on demand in developed countries – and reach the $190.00 level for major demand destruction from a global perspective. A growing risk to oil prices is a potential downturn in the global economy, which could be triggered by monetary and fiscal policy missteps. In addition to the volatility of energy prices, policy decisions are being complicated by rising food prices and uncertainty about future supply of fertilizer and agriculture production.
For the upcoming week, we are expecting oil prices to continue drifting downwards, unless there is an announcement of enhanced efforts to hinder the export of oil and oil products from Russia. Of course, if there is a negotiation breakthrough between Russia and Ukraine, there will be a significant downward movement in oil prices.