By Naveen Mathur
Crude oil saw a fantastic rally in 2022, with WTI crude surging more than 30 percent so far, albeit falling from a fourteen-year high of $130.5, tapped on 7th March. The black gold skyrocketed on supply concerns after Russia invaded Ukraine and the West propping up sanctions against the former. Geopolitical tensions in Europe accompanied by Yemen’s Houthi rebels attacking Saudi Aramco oil facilities in the Middle East, further escalated supply worries at a time when demand is growing from robust post-pandemic recovery.
Volatility has become the hallmark of global markets and this might persist until at least the war between Russia and Ukraine subsides. In the latest developments, Russia’s offer to “fundamentally cut back” its military operations in northern Ukraine sparked optimism around the potential for a peace deal, however, there’s strong reason for caution. People close to Kremlin said that de-escalation does not mean a cease-fire or complete withdrawal of troops from around the capital, which might be potentially misleading according to the US.
As a retaliatory move, Australia, Britain, Canada and the United States have imposed outright bans on Russian oil purchases following Moscow’s invasion of Ukraine. European Union remains divided so far on the energy embargo, with Germany, one of the major importers from Russia, warning a ban could push the economy into recession. Germany, however, has already reduced its dependence on Russian oil imports, and aimed to phase out those completely by the end of this year. Meanwhile, Poland is also mulling cutting its dependence on Russian oil. A structural shift is happening in the oil market as most of the Russian Urals shunned by Europe are flowing to Asia, particularly China and India. India has purchased at least 13 million barrels of Russian oil since 24th February, compared with nearly 16 million barrels in all of 2021.
Demand concerns rose amid a covid resurgence in China, prompting a lockdown in Shanghai. Shanghai started part two of its phased lockdown on 1st April, confining almost 16 million people living in the western part of the city to their homes for 4 days, after ending a four-day lockdown of the eastern half. The city’s daily infections shot up from less than five at the beginning of March to almost 6,000 earlier this week.
In a move to combat rising gasoline prices and supply shortages ahead of midterm elections, the Biden administration announced the largest-ever strategic petroleum reserve release, totaling 180 million barrels. The plan involves putting 1 million barrels of oil on the market, per day for six months and buying back at lower prices in futures, once production rises. The White House also asked US oil producers to increase output and said it would impose levies on those that were not making use of their drilling licenses on public lands. Earlier in March, the US announced an SPR release of 30 million barrels, which failed to cool down prices.
During the 27th OPEC+ meeting held on 31st March, OPEC and its allies stood back from the crisis engulfing oil markets, refusing to deviate from their schedule of gradual production increases and ratified the 432,000 barrel per day supply increase scheduled for May. Still, the group struggles to meet the allocated quotas and has been underproducing the quotas. Kazakhstan may lose about 320k bbl/d of oil output through April amid CPC pipeline shutdown, according to the Energy Ministry.
An unexpected release of SPR dampened the possibilities of the US-Iran nuclear deal happening anytime soon, after months of positive talks. Prime Minister Naftali Bennett and Foreign Minister Yair Lapid issued a joint statement earlier, urging Biden not to “abandon its closest allies in exchange for empty promises from terrorists.” Russia’s war on Ukraine is reshuffling Middle East diplomacy and forcing the US to reassess the political costs of reviving the 2015 nuclear accord with Iran. Meanwhile, US is in talks with Venezuela to ramp up production by removing sanctions imposed by former US President Donald Trump.
Going forward, we might see crude oil prices coming under pressure after record high reserve release from the US coupled with demand concerns from top consumer China, denting sentiments. Chinese demand is expected to decline after renewed lockdowns in Shanghai amid covid resurgence. Brent prompt spread backwardation has eased to $2 from multiyear lows of $4.64, hit earlier in the month, amid ceasefire talks between Russia and Ukraine. The quantum of fallouts from coordinated sanctions on Russia could be more evident in the coming days after production fell in March.
(Naveen Mathur, Director — Commodities and Currencies, Anand Rathi Shares and Stock Brokers. Views expressed are the author’s own.)
