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Oil could see its biggest supply shock since 1973

The global oil market was tight even before the Russian invasion of Ukraine, but its consequences on Russian crude supply and energy prices have the potential to hurl the market into a major supply shock comparable with the 1973 Arab oil embargo. Oil stocks in major oil-consuming developed economies, incl. in the U.S., have been falling steadily for several months now as demand rebounds

Oil could see its biggest supply shock since 1973

Washington, March 14 - Neftegaz.RU.U.S. market balances are tight, with commercial crude inventories of 411.6 million barrels, 13 % below the 5-year average for this time of the year, Oilprice analysed.
Gasoline inventories are some 1 % above the 5-year average, but distillate fuel inventories are about 18 % lower, and propane/propylene inventories are 21 % below the 5-year average for this time of year, the EIA’s latest inventory report showed.

As demand rebounds, global oil supply has struggled to catch up, as OPEC+ is adding just 400 000 barrels per day to the group’s oil production each month.
For months, the production increase has been lower than 400 000 bpd - and at times half of this figure - because many OPEC+ producers lack either the capacity or investments to boost output to their quotas.

As early as January, major investment banks started to predict that oil could hit $100 per barrel at some point this year due to tight market balances.

After Russia invaded Ukraine, it took just a month for prices to top the triple digits.
Now, the talk is whether oil could hit $150 a barrel as Russian oil is being shunned by European buyers, while China alone may not be able to take all the seaborne volumes that would have gone to Europe otherwise.

Russia will have to shut in some of its oil production as it will be unable to sell all the volumes displaced from European markets to other regions, with Russian crude production falling and staying depressed for at least the next 3 years, Standard Chartered said on Thursday.
Even before the U.S. ban on energy imports from Russia, trade in Russian commodities had become toxic for many global players.

The crisis in Ukraine added a lot of geopolitical risk premium to an already tight oil market to create a perfect storm for skyrocketing oil prices.
«Nothing is crazy in this oil market anymore», Michael Tran, managing director of global energy strategy at RBC Capital Markets, told Bloomberg last week, which saw wild swings in oil prices with Brent’s trading range in a record $33 per barrel.

The tight market and Russia’s struggles to sell its oil are setting the stage for the biggest supply shock since the 1970s - the Arab oil embargo of 1973 -1974 and the Iranian revolution of 1979, analysts incl. Reuters market analyst John Kemp note.

In early March, Daniel Yergin, vice chairman of IHS Markit, told CNBC, commenting on the consequences of the Russian invasion of Ukraine:
  • This is going to be a really big disruption in terms of logistics, and people are going to be scrambling for barrels
  • This is a supply crisis, it’s a logistics crisis, it’s a payment crisis and this could well be on the scale of the 1970s
France’s Economy and Finance Minister Bruno Le Maire said last week as carried by RFI:
  • The energy crisis today is comparable in intensity, in brutality, to the oil shock of 1973
  • In 1973 ... the response caused an inflationary shock, leading central banks to massively increase their rates, which killed off growth
  • The world would want to avoid such stagflation this year
The cure to high oil prices could be demand destruction or OPEC+ stepping up to fill the gap from Russia, which means OPEC producers with spare capacity - Saudi Arabia and the UAE - to be willing to increase production much more than the OPEC+ pact calls for, possibly without breaking up said the pact, in which non-OPEC Russia is a leading member.

The market will need those volumes, also because U.S. shale cannot significantly ramp up production in the short term.
Sanctions or not, «it has become increasingly clear that Russian oil is being ostracized», J.P. Morgan says.

The preliminary Russian crude loadings for March revealed a 1 million bpd drop in the loadings from the Black Sea ports, a 1 million bpd drop from the Baltics, and a 500 000 bpd drop in the Far East.

In addition, there is an estimated 2.5 million bpd loss in oil products loadings from the Black Sea, for a total loss of 4.5 million bpd, according to J.P. Morgan.
Natasha Kaneva, Head of Global Commodities Strategy at J.P. Morgan, said:
  • So large is the immediate supply shock that we believe prices need to increase to $120/bbl and stay there for months to incentivize demand destruction, assuming no immediate Iranian volumes

Author: Tsvetana Paraskova

Source : Neftegaz.RU


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