The price of Brent crude ended the week at $117.37 after closing the previous week at $107.33. The price of WTI ended the week at $113.90 after closing the previous week at $104.70.
During the week, the price of Brent crude spiked to $121.60 with the news of an attack on Saudi Arabia, along with an interruption to exports from the CPC pipeline (1.4 million b/d capacity) because of storm damage. The price of Brent crude declined with the realization that the attack on Saudi Arabia did not affect its ability to export crude oil. Additionally, while Russian officials indicated that it could take up to six weeks to repair the damage, oil loadings at the Novorossiysk export terminal associated with the CPC pipeline resumed with one of the three moorings sustaining only minor damage. Furthermore, the EU indicated that it would not be imposing sanctions on hydrocarbon exports from Russia, including crude oil and oil products. Such sanctions are seen as self-defeating because of the major negative impact the sanctions would have on European economies, including the economy of Germany.
At the beginning of the Russia-Ukraine conflict, the Biden Administration, in conjunction with the IEA, agreed to a major coordinated oil release. As with the last such action (in 2011 during Libya’s civil war) 60 million barrels of oil is to be released with US will be responsible for 30 million barrels. The Biden Administration is now considering an additional release from the SPR, which could be greater than the 30 million barrels associated with the previously announced SPR release. The decision is supposed to be made during the upcoming week and to be based on the expectations for supply, including Russian crude exports.
In last week’s note, we highlighted that 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 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. There are also signs that China is increasing 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. This is resulting in some shifting of supply with more barrels from Kazakhstan and Azerbaijan going to Europe and more Urals going to India.
Now that it appears that there will be no further sanctions on Russian exports of crude oil and oil products, we have the view that oil exports from Russia will be initially reduced by around 1.5 million b/d, and over the next few months, the reduction in exports will lessen as the oil market establishes workarounds for moving Russian oil to markets not being affected by sanctions.
From a demand perspective, we think that the IEA is overly pessimistic in reducing demand growth in 2022 to only 2.10 million b/d more than in 2021. We have concerns about the impact of high energy prices, fertilizer prices and food prices on economic growth; however, a major economic slowdown is not our reference scenario.
The initial February Purchasing Managers’ Indexes (PMIs) for the US indicate that economic growth in the US has been accelerating. The PMI for the service sector increased from 56.5 to 58.9, which is highest level in eight months. The PMI for the manufacturing sector increased from 57.3 to 58.5. In addition to the better-than-expected PMIs, companies reported a reduction in supply chain disruptions. Furthermore, the jobs market continues to tighten with the number of new claims for jobless benefits falling by 28,000 to 187,000, which is the lowest level in more than 52 years.
Another favorable development is that the recent trend of increasing COVID-19 cases reversed last week with cases declining by 11% and deaths declining by 21% from a global perspective during the last 14 days. Cases have started declining in Europe and Asia – and so far, the concern about cases increasing in the US, in similar fashion to Europe because of the emergence of Omicron ba.2 has not yet occurred. While China is making headlines by announcing a city-wide lockdown of Shanghai that is to last through next Sunday for COVID-19 testing, the number of cases in China remain relatively low.