CRUDE oil prices have reached a semblance of balance after a meteoric jump last month, when Dated Brent peaked at around US$137.04 per barrel on March 8. Prices are likely to be rangebound in the coming weeks, with bearish factors such as a Middle East-Yemen truce, the release of additional reserves by the US SPR and other members of the International Energy Agency, tempering the impact of short term supply risks due to the ongoing Russia-Ukraine war.
“Oil prices soared in February/March, but peak average impact is likely mid-year as balances tighten and inventories draw due to reduction in Russian oil exports although releases of strategic stocks by the US and the IEA will temper the shortfalls and likely keep peak prices around US$120/b on average,” S&P Global Commodity Insights said.
The road ahead is fraught with uncertainty, while persistent tightness in the oil markets threatens to shun price-sensitive consumers away, translating to demand destruction.
To quell the current tight supply, the IEA’s member countries agreed to release 120 million barrels of oil from storage, which includes 60 million barrels already pledged by the US, as part of its overall draw from its strategic petroleum reserve, IEA Executive Director Fatih Birol tweeted April 6.
This comes after the US pledged to tap 180 million barrels of oil last week, effectively releasing 1 million b/d for six months from May, to alleviate market concerns over potential shortages from a drop in Russian oil exports.
“The coordinated SPR releases of the US and IEA come in response to anticipated Russian crude production shut-ins, which we estimate will eventually reach 2.8 million b/d on cuts to refinery runs, lower seaborne exports to Europe, and insufficient export capacity heading east,” S&P Global said.
Disruptions could exceed this level if conditions in Ukraine trigger explicit restrictions on oil exports to Europe, or even secondary US sanctions targeting shipments elsewhere.
“In the meantime, the retreat of oil prices from recent highs is likely to help stabilize global oil demand after the 2022 growth has been revised down by 1.2 million b/d lately from the pre-war forecast,” it added.
The SPR release has provided some relief to refiners at major US crude importers, including South Korea, India, Taiwan, and Thailand, because it might provide a window for additional US supplies to become available to international buyers; as oil majors and trading companies in North American may have accumulated surplus light sweet crude barrels that they could push to the Far Eastern market.
As the SPR progressively feeds into the US' domestic refinery systems, South Korean refiners expect to see more light sweet crude and condensate supplies from the Permian and Eagle Ford basins find their way into international markets, according to the Korea Petroleum Association.
South Korea is especially keen to take as many cargoes from the US as possible as they continue to favour competitive US barrels in times of surging benchmark oil prices.
South Korean refiners paid on average US$90.11/b for shipments of US crude in February, lower than US$92.07/b paid for Saudi grades, the latest data from state-run Korea National Oil Corp. showed.
In addition, Indian refiners were hoping to see lesser demand for Iraq's Basrah crude from US end-users once the SPR releases kick-off. Iraq's Basrah supply for Asia had tightened, and price differentials surged as the US sought to take more Iraqi barrels to compensate for its cutback of Russian crude.
Russian oil continues to grab the spotlight. Recent media reports suggested that Yemeni Houthi rebels have signed a truce with Saudi Arabia, temporarily reducing oil supply disruptions from that source.
Among the latest strikes was one that occurred on March 25, when Houthi rebels launched attacks on a petroleum products storage facility in Jeddah, as well as other refineries and sites in the kingdom, propping up crude oil prices by more than US$4/b in response.
Meanwhile, OPEC and its allies approved another modest oil production increase March 31, saying it saw no need to respond to oil disruptions arising from the war in Ukraine, which is being waged by key member Russia; despite pressure from major consuming economies for more supplies.
The coalition continues to expect the oil market to be in surplus every quarter of 2022, including a full-year oversupply of 1.3 million b/d, according to a report prepared for delegates by the OPEC secretariat and seen by S&P Global.
Still, Russian oil remains a key concern for market watchers. The European Union on April 3 called for more sanctions against Russia, with EU ministers discussing ending Russian energy imports, after Ukraine accused Russian forces of war crimes near Kyiv.
Russian gas accounted for around 45% of EU gas imports and close to 40% of its total gas consumption in 2021, while about 2.7 million b/d of Russian crude were exported to the EU, or around a quarter of total EU imports, before the invasion of Ukraine.
Any further ban on Russian energy imports by Europe will likely throw oil markets into disarray. Although a potential Ramadan ceasefire in Yemen has been agreed upon, geopolitical tensions persist elsewhere, with news of energy infrastructure in Erbil, the capital of Kurdistan, being attacked by rockets recently.
Also, while the SPR releases are viewed as a welcome move to provide reprieve in a tight market, some market sources are still sceptical about the extent of its impact, saying that such measures would only ease supply temporarily amid continued geopolitical tensions.
In the end, while crude may be rangebound in the short term, global crude tightness will potentially escalate on thinner OPEC+ spare capacity in coming months, up to a point where price-sensitive oil consuming nations could see some demand destruction.
Surabhi Sahu, Senior Editor, S&P Global Commodity Insights