Oil could experience its biggest supply shock since 1973

The global oil market was already tight before Russia’s invasion of Ukraine, but Putin’s war and its aftermath on Russian crude supply and energy prices has the potential to send the market into a shock. major supply chain comparable to the Arab oil embargo of 1973. Oil inventories in major oil-consuming developed economies, including the United States, have been falling steadily for several months now as demand rebounds.

Balances on the US market are tight, with commercial crude inventories at 411.6 million barrels, 13 percent below the five-year average for this time of year. Gasoline inventories are about 1% higher than the five-year average, but distillate inventories are about 18% lower and propane/propylene inventories are 21% lower than the five-year average for this period of the year. year, according to the latest EIA inventory report for the week ending March 4 show.

As demand rebounds, global oil supply is struggling to catch up, as OPEC+ adds just 400,000 barrels a day to the group’s oil production each month. For months, the increase in production has been less than 400,000 bpd – and sometimes half that figure – because many OPEC+ producers do not have the capacity or the investment to increase production until to their quotas.

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

After Russia invaded Ukraine, it took only a month for prices to to exceed three digits. Now the discussion is whether oil could reach $150 a barrel as Russian oil is shunned by European buyers, while China alone may not be able to take all the shipping volumes that would otherwise have gone into Europe.

Russia will have to lock up part of its oil production as it will not be able to sell all the volumes displaced from European markets to other regions, with Russian crude production falling and remaining depressed for at least the next three years, Standard Chartered said Thursday. Even before the American ban on energy imports from Russia, the trade in Russian raw materials had become toxic to many global players.

The war in Ukraine has added a lot of geopolitical risk premium to an already tight oil market to create a perfect storm for soaring oil prices.

“Nothing is crazy in this oil market anymore”, Michael Tran, managing director of global energy strategy at RBC Capital Markets, said Bloomberg this week, which saw wild swings in oil prices with the Brent trading range at a record high of $33 a barrel.

The tight market and Russia’s difficulties in selling its oil are setting the stage for the biggest supply shock since the 1970s – the Arab oil embargo of 1973-74 and the Iranian revolution of 1979, analysts say , including Reuters market analyst John Kemp. Remark.

In early March, Daniel Yergin, Vice President of IHS Markit, said CNBCcommenting on the consequences of the Russian invasion of Ukraine:

“It’s going to be a very big disruption in terms of logistics, and people are going to be scrambling for barrels.”

“It’s a supply crisis. It’s a logistics crisis. It’s a payments crisis, and it could well be on the scale of the 1970s,” Yergin added.

Related: OPEC Discusses Oil Market With U.S. Shale Executives

The energy crisis is today “comparable in intensity, in brutality, to the oil shock of 1973”, declared this week the French Minister of Economy and Finance, Bruno Le Maire, carried by RFI.

“In 1973…the response caused an inflationary shock, leading central banks to massively raise rates, which killed growth,” Le Maire said, adding that the world would like to avoid such stagflation this year.

The cure for high oil prices could be demand destruction. Or OPEC+ is stepping up to close the gap with Russia, which means OPEC producers with spare capacity – Saudi Arabia and the United Arab Emirates – are ready to increase production far more than the OPEC+ pact does not require it, perhaps without breaking said pact, in which non-OPEC member Russia is one of the main members.

The market will need these volumes, also because US shale cannot significantly increase production in the short term.

Sanctions or not, “it has become increasingly clear that Russian oil is ostracized”, JP Morgan said.

Preliminary Russian crude loadings for March showed a drop of 1 million bpd in loadings from Black Sea ports, a drop of 1 million bpd from the Baltic and a drop of 500,000 bpd in the Far East. In addition, there is an estimated loss of 2.5 million bpd in shipments of petroleum products from the Black Sea, for a total loss of 4.5 million bpd, according to JP Morgan.

“The immediate supply shock is so large that we believe prices need to rise to $120 a barrel and stay there for months to incentivize demand destruction, assuming there is no immediate Iranian volumes,” said Natasha Kaneva, head of global commodities strategy at JP Morgan.

By Tsvetana Paraskova for Oilprice.com

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