Last week, oil prices continued fluctuating in the range of $100-113 a barrel. During the week, there was news that moved prices up and down without changing the market’s medium-term outlook.
On Thursday, when writing this piece, oil prices rose modestly after a strong rally on Wednesday, with Brent crude trading at $107.88 a barrel and West Texas Intermediate prices at $106.13 a barrel. The growing fears of the onset of a cooling global economy amid high inflation have been offset by supply concerns due to geopolitical tensions in Eastern Europe.
Oil prices are still under pressure due to weak financial markets over rising interest rates, a strong US dollar, concerns over inflation and possible recession and prolonged COVID-19 lockdowns in China, the world’s largest importer of crude oil. All these factors weaken demand growth and limit the rise of oil prices.
In its monthly oil market report released on Thursday, OPEC lowered its forecast for global oil demand growth in 2022 for a second straight month by 300,000 barrels per day to 100.2 million bpd. It cited the impact of the Ukraine crisis, rising inflation and the resurgence of the Omicron coronavirus variant in China as the main contributors.
OPEC has slashed almost 800,000 bpd from its demand-growth forecasts since the crisis in Ukraine broke out.
Also, on Thursday, the IEA published its monthly report, in which it also revised down its global oil demand estimates for 2022 by around 100,000 bpd to 99.4 million bpd. The agency also attributed the downtrend to escalating lockdowns across China while envisaging increasing prices for the rest of the year as the Ukraine crisis shows little sign of easing.
Meanwhile, the European Union is still agreeing on a comprehensive oil embargo against Russia. The bloc hopes Europe will stop importing Russian oil by the end of the year, but concerns remain. So far, the decision has been postponed because Hungary opposes the ban, believing that it would be too destructive for its economy. However, the EU can offer Hungary financial compensation to support the embargo. In addition, the bloc will drop a proposed ban on EU-owned vessels transporting Russian oil to third countries.
European oil traders intend to reduce activities with Russia when tighter EU rules on Russian oil sales come into effect on May 15. The world’s largest trader, Trafigura Group, will stop all crude oil purchases from the Russian state company Rosneft by May 15. Other traders are expected to cut their imports in the second half of May unless it is strictly necessary to meet the EU’s energy needs.
According to the IEA, the EU has slashed its Russian crude oil and petroleum products purchases by 15 percent after the crisis. Russia’s oil output declined by 900,000 bpd in April and is expected to decline by a further 600,000 bpd this month — totaling around 1.5 percent of the world’s oil output since the Ukrainian crisis began.
However, OPEC said Russian oil output this year would be roughly 10.9 million bpd, a more optimistic figure than the IEA’s, but still 350,000 bpd less than expected in April.
According to JPMorgan Chase Bank, the EU initiative to introduce a phased ban within six months on importing Russian oil will lead to a deficit in the market by 1.0-1.5 million bpd by the end of the year. Meanwhile, the bank maintains its forecast for Brent at $114 a barrel in the second quarter, while prices are expected to rise above $120 a barrel at some point this year, even as the average price by the end of 2022 is projected at $104 a barrel.
Avoiding Russian oil in the EU opens the door to supplies from other producers. But the Secretary-General of OPEC Mohammed Barkindo warned the EU last month. He said: “We could potentially see the loss of more than 7 million bpd of Russian oil and other liquids exports, resulting from current and future sanctions or other voluntary actions. It would be nearly impossible to replace a loss in volumes of this magnitude.”
In this respect, the Saudi Energy Minister, Prince Abdulaziz bin Salman, said at a conference in Abu Dhabi last week: “The world needs to wake up to an existing reality. The world is running out of energy capacity at all levels.”
He added, “not enough investment in global refining capacity is one of the key drivers of the global rally in gasoline, diesel, and jet fuel prices.”
At the same conference, the UAE’s Energy Minister Suhail al-Mazrouei said that OPEC+ might not be able to guarantee enough supply when the world fully recovers from the COVID crash in demand. He warned that the extreme volatility in the oil market in recent weeks results from some buyers boycotting certain crudes; it is not connected with OPEC+ and is outside the alliance’s control.
It’s worth mentioning that Saudi Arabia and the UAE are the only two oil producers that are believed to have sufficient spare oil production capacity.
But, it seems that these warnings from OPEC did not make any impression on the decision-makers in Brussels, who are moving full steam ahead with the oil embargo at a time when alternative suppliers are struggling to fill the void left by Russian oil.
Thus, in recent days, the situation in the oil market has not fundamentally changed. There is no important news that can push prices into another range yet. At the same time, factors in favor of rising prices and their decline mutually compensate for each other. For this reason, oil prices will continue fluctuating in the range of $100-115 a barrel.
• Dr. Namat Al-Soof is an Iraqi oil expert with long experience in upstream and market analysis. He held senior analyst positions at OPEC, IEF in Riyadh, and OPEC FUND for International Development. Currently, he is a consultant to a number of companies in the oil industry.