Wait and See

This weekly report is an excerpt from our Short-Term Outlook service analysis, which covers a period of eight quarters and provides monthly forecasts for crude oil, natural gas, NGL, refined products, base petrochemicals and biofuels.  Contact John Paisie (+1-832-517-7544 or E-mail) for the detailed analysis or for more information about the Short Term Outlook.


Infographic

The price of Brent crude ended the week at 107.33 after closing the previous week at $112.67. The price of WTI ended the week at $104.70 after closing the previous week at $109.33.

Oil prices have moved downward from the high of around $130 for several reasons:

  • The US dollar has strengthened significantly as the result of being seen as a safe haven, and with the expectations for future rate increases. While the US Dollar Index declined last week to 98.23 (from 99.12 of the previous week) the index has increase from 95.38 at the beginning of February (and from 89.64 in May 2021).
  • There are growing concerns about oil demand. Last week, the IEA reduced its outlook for global oil demand for 2022 by 950,000 b/d and for 2Q22 – 4Q22 by 1.30 million b/d. With the reduction, the IEA is now forecasting that total demand for 2022 will be only 2.10 million more than in 2021. The reduction stems from increased commodity prices and the lower economic growth stemming from the sanctions placed on Russia. (Note: Stratas Advisors thinks this forecast is overly-pessimistic at this time – as further explained in the Demand Section of this note)
  • Additionally, there has been a rebound in COVID-19 cases with the number of cases from a global perspective increasing by 14% over the last 14 days with the arrival of the BA.2 subvariant of Omicron. Cases are increasing at a significant pace in Europe and Asia, most notably in China. Additionally, it is expected that cases will be increasing in the US soon. While it is highly unlikely that severe restrictions will be reinstituted (so far, the bulk of the cases have mild symptoms), rising cases still reduces economic optimism.

Most importantly, crude oil is still flowing at volumes similar to volumes prior to the Russia-Ukraine conflict. Currently, the sanctions pertaining to Russia’s exports of crude oil and oil products are not that broad with only the US, Canada, UK, and Australia (representing around 12% of Russia’s oil exports) explicitly stating that it will not take any oil-related imports from Russia. As such, Russia is still exporting oil to Asia at levels similar to the beginning of the Russia-Ukraine conflict. Additionally, India is now importing more barrels from Russia, including in March with imports averaging around 360,000 b/d, which is about four times the average of 2021. Furthermore, India has agreed to increase crude oil imports from Russia with the transactions being done on a rubles/rupees basis. China is also expected to increase its imports of Russian crude oil. In contrast, Europe is showing signs of reducing crude oil imports from Russia, by some 1.0 million b/d in March. These demand developments are resulting in some shifting of supply, including more barrels from Kazakhstan and Azerbaijan going to Europe and more Urals going to India. In total, the impact on the volume of Russian crude exports appears to be moderate, so far.

Oil prices are still high because of the uncertainty surrounding the Russia-Ukraine conflict, and the potential impact on supply – and will continue to be vulnerable to the market reacting and over-reacting to news flow. Oil prices will also be affected by changes in oil flows and a less-efficient supply chain, including increased shipping costs.

From a downside perspective, we remain concerned about the stability of economic growth, including the possibility of policy missteps by central bankers, which will lead to an economic slowdown.  The odds of a policy misstep are increasing with the complexity of setting policy within the context of the conflict between Russia and Ukraine – and the resulting high energy prices, fertilizer prices and food prices. All geographic regions are vulnerable to these elevated prices and the associated tight supply/demand conditions. The most vulnerable regions (and countries) are the ones which are the major importers, including Europe and Asia. The longer and the more extensive the conflict – the greater the probability of an economic downturn – and energy and food price shocks – and even physical shortages.

For the near-term, we are expecting that the price of Brent crude oil will bounce between $95.00 and $115.00 depending on the news flow – and will remain within this range until there is some significant change in the supply/demand dynamics.

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