Fourth consecutive day of increases of more than 3% for the price of oil. The ‘black gold’ has earned this nickname again after exceeding 100 dollars without looking back. Brent-type oil, the reference crude in Europe, has reached 118 dollars per barrel, levels not seen since 2013. The oil market is trading in a tense balance that has no net or cushion below. With inventories at a minimum and geopolitics adding uncertainty, any movement has the ability to trigger very sharp movements in the price as has been seen in recent days.
Supply has taken over from demand to continue driving the price of oil. If in the past months it was the demand, in the midst of the economic recovery, that dominated the market, now it is the problems that come from several of the large producers (supply). Brent futures soar 6% and the barrel touches 119 dollars.
OPEC does not move
On the one hand, OPEC and its allies have refused to open the oil taps with greater intensity. OPEC has announced that it will continue to increase oil production by 400,000 barrels per day (kb/d) each month at the meeting that took place this Wednesday. On the other hand, the international repudiation of Russian oil is leaving the world’s largest exporter of oil products out of the market, de facto reducing the global supply of oil.
The Organization of Petroleum Exporting Countries (OPEC) has no intention of changing its roadmap. With oil prices above 100 dollars and shifting ‘the blame’ to the war between Russia and Ukraine, the countries that make up the cartel do not want to deflate a rally that may still have some way to go. The risk is that inflation will derail the global recovery and end up hurting everyone, oil consumers and exporters alike. But the short-term benefits are very tempting and OPEC will not give them up.
From Commerzbank they believe that OPEC could have winked at oil importers, but Russia’s closeness to the cartel (OPEC +) may be an impediment: “An additional increase in production of 400,000 barrels per day was considered safe. It would be more important to have seen some willingness to make enough oil available in case there are supply cuts.”
However, the OPEC statement does not make a single reference to the conflict between Russia and Ukrainewhile some analysts assure that the meeting would not have lasted more than nine minutes, being the shortest in history.
OPEC is producing some 28.1 million barrels per day, compared to the 30 million it produced before the covid pandemic made its devastating appearance. So the cartel is producing between 1.5 and 2 mb/d less per day, while global oil demand will be higher this year than it was in 2019 (pre-pandemic), according to the International Energy Agency ( IEA). This imbalance is generating a drop in inventories and relaunching the price of oil. Inventories of petroleum products of developed countries is below 2.7 billion barrels.
Warren Patterson, economist at ING, points out in a note that the concern in the market is that although the group had announced considerable increases in production, in the end they do not end up carrying them out. The current production data is not consistent with the supposed increases that should have been carried out. OPEC would not even be complying with the increase of 400,000 barrels per day.
The repudiation of Russian oil
The other driver of the price of crude oil is the conflict between Russia and Ukraine. According to the International Energy Agency, Russia is the largest exporter of petroleum products in the world and the second largest exporter of crude oil, only behind Saudi Arabia.
In December 2021, Russia exported 7.8 million barrels (of oil products) per day (mb/d), of which crude and condensate accounted for 5 mb/d, or 64%. Exports of petroleum products totaled 2.85 mb/d, of which 1.1 mb/d of diesel, 650 kb/d of fuel oil and 500 kb/d of naphtha and 280 kb/d of vacuum gas oil (VGO). Gasoline, LPG, jet fuel and other derivatives complete the remaining 350 kb/d.
Commerzbank economists add that the amount of oil to be released by developed countries would only cover two weeks of Russian oil shipments. Right now, “the market seems to be pricing increasingly a disruption of Russian oil shipments. More and more Western oil companies are announcing their withdrawal from the country, while several shipping companies are no longer accepting transportation contracts to or from Russia.”
This isolation is weighing on Russian oil that does not find buyers beyond China and some satellite country of Moscow. “It is not surprising then that Russian oil is losing buying interest. The Russian Urals oil discount against Brent reached $18 per barrel yesterday in the physical market, something not seen since the fall of the Soviet Union”.
Apparently and according to data from Commerzbank, Russian oil did not find too many buyers despite being sold at a historical discount against Brent. If the global market loses the millions of barrels of crude that Russia exports every day, it will be almost impossible to find a producer to supply Moscow. The result will be much scarcer and much more expensive oil: the return of ‘black gold’.
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