The price of Brent crude ended the week at $111.66 after closing the previous week at $102.78. The price of WTI ended the week at $106.54 after closing the previous week at $98.26.
The price of Brent crude fell last Monday to $98.48 because of concerns about weakening oil demand coupled with improving supply outlook with the announcement by President Biden of the largest release in history from the SPR (one million b/d for the next six months starting in May). Additionally, Russia has been continuing to export crude oil at levels not dissimilar to the levels prior to the initiation of the Russia-Ukraine conflict. The direction of the price movement then reversed with the reporting that the EU was drafting sanctions on imports of oil from Russia. However, as we have been forecasting for weeks, the price of Brent crude remained within the price range of between $95 and $115 with price movements remaining highly sensitive to news flow.
In our note published on April 4th we put forth the view that the additional release from the SPR would have diminishing impact – despite that the additional planned release from the SPR would place US supply of crude oil on par with the pre-COVID level. However, global supply of crude oil – even without considering the impact of Russia-Ukraine conflict – has been running around 2.2 million b/d less than during the first quarter of 2019, while demand is approaching pre-COVID levels. Furthermore, the current oil price includes a risk premium to account for the possibility of a major disruption to supply – including the expansion of sanctions to cover Russia hydrocarbon exports – which would be in the order of several million barrels-per-day. In that case, the release of 180 million barrels would not be able to cover the missing barrels. Consequently, the additional release from the SPR will not alleviate tight supply/demand conditions, nor will the release have much impact on the risk premium associated with current crude prices. The price dynamics of the previous week highlighted this exact point with the price of Brent crude moving higher than before the announcement of the additional SPR release in response to the reporting that the EU is considering sanctions on Russia oil.
While the EU now appears to be seriously considering sanctions on Russia oil (see the section on Geopolitics), Russia has been continuing to export crude oil at levels not dissimilar to the levels prior to the initiation of the Russia-Ukraine conflict. During the first week of April, Russia’s exports via tankers reached the highest level of the year. Our recently revised supply forecast (March of 2022) includes a reduction of 1.50 million b/d of Russian crude exports to Europe, plus reduction of around 0.500 million b/d to the US and another 0.250 million b/d to Japan and South Korea. With the imposition of sanctions by the EU, we are expecting that volumes of Russian crude exports to the EU will ultimately increase beyond our forecast of 1.5 million b/d. However, because of the time required to reach final agreement on the sanctions and the expectation that the sanctions will provide time for major importers, such as Germany, to secure alternative supplies, we do not expect that the sanctions will have much impact beyond the 1.5 million b/d during the next several months. Additionally, we are still expecting that Russia will be able to expand exports to consumers in Asia, including India and China. However, it will take time to overcome the logistical hurdles, including longer shipping times and that the Russian ports on the Black Sea and the Baltic Sea cannot accommodate VLCCs. The expansion of Russia exports to Asia will also be restricted by existing contracts for Asian refiners to take crude supply from Middle East producers. Consequently, the net loss of Russian exports of crude oil will be around 1.4 million b/d.
However, for 2022, we are expecting that demand will be less than our initial forecast by some 0.650 million b/d, which translates into demand growing by around 3.00 million b/d, in comparison to 2021. There is also further downward risk to the demand forecast because of the possibility of a significant economic downturn. At this time, we think this is still unlikely, in part, because we think Russia will be able to continue to export oil in sufficient volume that keeps oil prices from reaching levels that will result in widespread demand destruction. Crude prices need to reach $145.00 to have much impact on developed markets and approach $195.00 for major demand destruction.