S&P Global Commodity Insights: Oil price volatility is here to stay as supply, demand risks abound

A number of fears have gripped the oil market – recession, demand destruction, supply disruptions and rock bottom spare capacity to name a few, –so volatile prices are not surprising and are here to stay.

S&P Global Commodity Insights summed it appropriately when it said in its May Commodities Brief: “For the oil market, the multitude of moving parts is enough to make anyone’s head spin.”

Prices have retreated recently, with the physical sweet crude benchmark Platts Dated Brent falling 9% to around $103/b on May 10 from May 6 as worries about demand destruction, particularly in China, came to the forefront and concerns around Russian supplies eased as the European Union’s plan for a bloc-wide embargo faltered.

Latest shipping data showed that Russian oil exports continued to flow into the world market as price discounts lured buyers. The price of Russian Urals – a key crude grade that the country exports – has been around $35/b cheaper than Dated Brent, S&P Global data showed.

Shipped crude exports from Russian ports averaged 5 million b/d from May 1-6, little changed from the 5.03 million b/d averaged during April when its seaborne exports hit a post-pandemic high, according to shipping analytics provider Kpler.

Although more than 1.8 million b/d of Russian crude exports remain headed for unknown destinations, subsequent updates are likely to show large volumes of crude are being imported by India as it takes advantage of record low values for Russian crudes.

In April, India's imports of Russian crude ballooned to almost 900,000 b/d, the data shows, from less than 40,000 b/d in February.

But Russian exports are expected to be disrupted in the months ahead as tighter sanctions around dealings with Russian state-owned oil and gas companies including Rosneft and Gazprom kick off from May 16, and the EU member states work toward a bloc-wide embargo on Russian oil in the coming weeks.

“Russian oil exports have yet to show a material decline from pre-war levels. Still, we see Russian supply losses getting up to 2.8 million b/d at peak, now assumed by August, primarily driven by growing restrictions on existing sanctions and potential new EU sanctions on the import of Russian oil (currently being debated, but proposal indicates growing momentum in key European countries),” S&P Global said in its Commodities Brief.

Reports that Russian wellhead production has fallen by roughly 1 million b/d suggests downside on exports is in the offing, it added.

The latest Platts survey by S&P Global showed that Russian oil production fell by 900,000 b/d to 9.14 million b/d in April from March.

The fall in Russian production along with declines from Libya, Nigeria and Kazakhstan took production by OPEC and its partners to a six-month low of 41.58 million b/d, the Platts survey found.

Covid in China erodes demand growth

S&P Global has revised down oil supply growth by 300,000 b/d to 4.7 million b/d for 2022. Global oil demand growth for 2022 has also been revised down again, and the driver is primarily China.

“We now see a demand growth of 2.6 million b/d in 2022, a reduction of 0.3 million b/d versus last month’s outlook. China is expected to have no growth in oil demand this year because of the extensive lockdown in cities as well as towns and counties,” it said.

“China’s current contraction, together with the ongoing Russia-Ukraine war, and high oil prices, has led to a cumulative month-on-month demand decline of 3.1 million b/d in March and April over February.  Going forward and from a relatively low base in April, we do see a surge of oil demand month on month in May through August, adding as much as 7.3 million b/d of demand. However, if the pre-war February is used as a base, the projected May-August growth is more ‘normal’ at 4.2 million b/d,” it added.

China's commitment to its zero-COVID policy means that oil demand will be taking a hit as authorities try to clamp down on the movement in several parts of the country to curb infections, with cities such as Shanghai and Beijing becoming the epicentre of restrictions.

Reflecting lacklustre demand, China’s crude imports in the first four months fell 4.8% year on year to 10.44 million b/d, data from the General Administration of Customs showed May 9.

S&P Global estimated that China’s oil demand would fall 6% year on year in Q2 and said that it is uncertain whether the reduction in this quarter will be compensated by recovery in the second half of the year if Beijing continues with is dynamic zero-COVID strategy.

While crude oil prices pulled back from March’s peak toward $104/b on average in April with the announced release of strategic oil stocks, resilient Russian oil exports so far, and slower demand growth, they are expected to stay supported at around $105/b in May with seasonal demand growth, according to S&P Global. However, it is advisable to brace for more volatility as risks abound both to supply and demand.

Surabhi Sahu, Senior Editor, S&P Global Commodity Insights