New Delhi: Global energy markets appear to be taking a step forward and another step back amid the ensuing volatility in crude oil prices, with dated Brent currently hovering around $110/bbl. Tight fundamentals on the supply side, reflecting low inventories available in the market, and limited spare capacity are mitigating the impact of recession-induced demand destruction in economies struggling with prospects for weakening in a context of growing inflationary pressures.
Last month’s G7 meeting added an element of uncertainty to an already volatile market, as its leaders gave mixed signals on a proposed cap on international Russian oil prices in response to the war in Ukraine. On broader energy goals, the G7 has pledged to work with the International Energy Agency to try to limit disruption from war and to explore additional measures to reduce price spikes. However, it remains to be seen how these efforts pan out.
Oil prices should be volatile, but limited with monthly averages going from the level of 120 $/b at the beginning of July to 100 $/b at the end of the year. Almost all price movements will be at the front of the futures price curve.
On an annual basis, global oil demand is expected to climb 2.8 million bpd in 2022, but remain about 1.5 million bpd below pre-pandemic levels, Platts Analytics said. , noting that the recovery was led by jet fuel as air travel returned. with a vengeance after countries around the world eased movement restrictions related to COVID-19. Beyond this year, oil demand growth for 2023 is forecast at 2.4 million bpd, with the total eventually exceeding demand in 2019.
Meanwhile, China’s oil demand has recovered from this year’s low in April and is expected to rise through the end of the year. However, the growth is only enough to keep China’s total demand at the same level as in 2021, Platts Analytics said. This means that for the first time in decades, China will not contribute to global demand growth in 2022.
This comes even as Asia’s biggest oil consumer has access to plenty of discount crudes, with a growing queue of sellers of Russian Urals, Iranian crudes, Malaysian blends and bitumen blends.
Imports of these discounted crudes by China’s independent refiners amounted to 6.25 million metric tons, or 45.8 million barrels, in June via ports in Shandong and Tianjin, representing about 83, 7% of total raw materials imported through these ports. This was well above their 5 million tonnes imported in May, which accounted for 61.1% of total raw material imports.
The threat of further curbs on COVID-19 amid the emergence of new variants remains in China as it follows a so-called dynamic zero COVID policy, which is weighing on the country’s oil demand and raising fears of a recession-like situation. This comes as some Western countries are already likely heading into a mild or even full recession.
While crude oil imports from China fell 1.7% between January and May, according to data from the General Administration of Customs, inflows from India increased. From January to May, India’s crude imports rose 8.5 percent year-on-year to 96.97 million tonnes, according to data from the Petroleum Planning and Analysis Cell.
Indian government officials and state refiner sources told S&P Global that Russian crude oil is not subject to any sanctions and payment continues to be made through normal mechanisms. In addition to Russia, the country is also exploring options to sign forward crude contracts with smaller suppliers, with refiners even eyeing Guyana, Azerbaijan and Gabon for supplies.
Global oil supply is increasing, with Platts Analytics revising its forecast upward from 0.2 million b/d for 2022 to 5 million b/d. Growth for 2023 now stands at 3.2 million bpd. Although Russia was slapped with harsh Western sanctions for its invasion of Ukraine, its exports remained largely resilient.
“We maintain our view that Russian oil supply losses will peak at 2 million barrels per day by the end of 2022 given the EU import and insurance ban as well than diversion of some cargo elsewhere, but now assume a slower trajectory with the largest losses later in the fourth quarter,” Platts Analytics said.
As for Iran, Platts Analytics still assumes an Iran interim nuclear deal by the end of 2022 that will facilitate a 0.5 million b/d increase in Iranian oil through Q1 2023.
However, even Iran may not be as big as other global challenges – weather disruptions, underperformance, politics/protests and export issues – lurk, leaving risks skewed to the downside.
OPEC and its Russian-led allies boosted crude oil production by 390,000 bpd in June, according to the latest Platts survey from S&P Global Commodity Insights, but a wide quota gap persists. Several members of the alliance have consistently faced supply disruptions in 2022 caused by sanctions, geopolitical instability, unplanned outages, scheduled maintenance and technical issues.
The OPEC+ alliance is due to meet on August 3 to decide production levels for September and possibly beyond. As it stands, the OPEC+ deal provides for August quotas to remain frozen until the end of the year.
US SPR/IEA emergency releases are expected to end after October, with spare capacity uncomfortably low, heading to just 1.2 million bpd by August, Platts Analytics said.
Meanwhile, recent volatility in Libyan production, continued risks to Middle Eastern oil supply from potential Houthi attacks, and impending hurricane season for US Gulf Coast producers are other bullish factors for oil prices.
Ultimately, supply risks are pitted against oil demand growth, which is primarily dependent on a stable global economy. It’s a tough task to accomplish amid the risk of a recession, which is keeping the market on edge and creating more short-term volatility.
[This piece was written exclusively for ETEnergyworld by Surabhi Sahu, Senior Editor, S&P Global Commodity Insights]