Why oil prices slip below US$100 per barrel?

Oil prices have slipped below US$100/barrel this week despite the ongoing war in Ukraine and a structurally tight market. To understand the factors moving oil markets, make sure you sign up this blog to get regular updates.

The return of Iranian oil to markets is back on the global agenda after Moscow received guarantees that it could continue trading with Iran after sanctions are lifted. This news sent crude prices below the US$100/barrel mark, the lowest level in three weeks.

The reappearance of COVID-19 in China only added to the downward pressure in oil markets as the country hit a two-year high of 3,500 cases on Monday, doubling day-on-day. Stringent curbs were reintroduced in many major cities, most notably Shanghai and Shenzhen being put under lockdown.

This raises fears that Chinese demand over the upcoming weeks might drop below the stagnating levels of first two months of 2022.

In spite of the IEA claiming that Europe could essentially halve its dependence on Russian gas imports within a year, March gas flows have so far averaged 30% higher than February. 

Leading oil majors Shell, BP, and Equinor announced they would not be trading Russian oil and products for the foreseeable future, but that is not the case with gas. 

European spot gas prices have in fact come down over the past week on higher Russian pipeline supplies, with May ‘22 TTF prices trending around US$40/mmBtu. 

Gazprom exports in January 01 to March 15 to non-CIS countries have totaled 30.7bcm, down 28%YoY, primarily on the back of Europe seeing mild weather throughout the winter season. 

European Union Endeavor

European Union member states have agreed on a fourth package of sanctions against Russia following its invasion of Ukraine. The details of the sanctions were not disclosed. It is anticipated Russia's "most favored nation" trade status would be revoked. This could open the door to the bloc banning or imposing punitive tariffs on Russian goods and putting Russia on a par with North Korea and Iran.

Sanctions were set to include an import ban on Russian steel and iron, an export ban on luxury goods including cars worth more than US$55,000 and a ban on investments in oil companies and the energy sector. They would also add Chelsea football club owner Roman Abramovich and 14 others to the EU list of sanctioned Russian billionaires, diplomats said earlier in the day.

European Commission President Ursula von der Leyen has also said the EU was working to suspend Russia's membership rights of leading multilateral institutions, including the International Monetary Fund and the World Bank.

The latest sanctions will be formally in place once they have been published in the EU's official journal, which will follow soon.

OPEC Stance

Organization of the Petroleum Exporting Countries (OPEC) said on Tuesday that oil demand in 2022 faces challenges from Russia's invasion of Ukraine and rising inflation as crude prices soar, increasing the likelihood of reductions to its forecast for robust demand this year.

Oil prices shot above US$139 a barrel this month, hitting peaks not seen since 2008, as Western sanctions tightened on Moscow over its invasion of Ukraine and disrupted oil sales from Russia, helping to fuel inflation that was already rising.

In a monthly report, OPEC stuck to its view that world oil demand would rise by 4.15 million barrels per day (bpd) in 2022 and increased its forecast of global demand for its crude.

But OPEC, which just a month ago had raised the possibility of a more rapid demand increase in 2022, said the war in Ukraine and continued concerns about COVID-19 would have a negative short-term impact on global growth.

"Looking ahead, challenges to the global economy – especially regarding the slowdown of economic growth, rising inflation and the ongoing geopolitical turmoil will impact oil demand in various regions," OPEC said in its report.

"While the year started on relatively solid underlying footing, the latest events in Eastern Europe may derail the recovery," OPEC said in its commentary on the world economy.

World oil consumption is expected to surpass the 100 million bpd mark in the third quarter, in line with OPEC's forecast last month. OPEC nudged up its forecast of the year's total oil use by about 100,000 bpd to 100.90 million bpd.

On an annual basis, OPEC said the world last used more than 100 million bpd of oil in 2019.

Oil prices extended their earlier decline after the report was issued, trading further below US$99/barrel on the perception of easing supply risks.

The report also showed higher output from OPEC as the group and allied non-members, known as OPEC+, gradually unwind record output cuts put in place in 2020.

OPEC+ has aimed to raise output by 400,000 bpd a month, with about 254,000 bpd of that due from 10 participating OPEC members, but production has been increasing by less than this as some producers struggle to pump more.

Still, the report showed OPEC output in February bucked that trend and rose by 440,000 bpd to 28.47 million bpd, driven by higher supply from top exporter Saudi Arabia and a recovery from outages in Libya.

The growth forecast for overall non-OPEC supply in 2022 was left unchanged, as was that for production of US tight oil, another term for shale.

OPEC said it expects the world to need 29 million bpd from its members in 2022, up 100,000 bpd from last month and theoretically allowing further increases in output.

 

Geopolitics to drive oil prices once again

I have picked up some news items from Oil & Energy Insider that support my hypothesis that US Shale output will continue to rise but some of the oil producing countries may become victim of commotion, anarchy and proxy wars. This will automatically reduce the supplies from these countries and there will be no pressure on OPEC to extend output cuts anymore.

Energy sector analysts are desperately awaits the outcome of OPEC’ meeting in Vienna scheduled for 25^th May. While the overwhelming expectation is that the cartel will agree on a six-month extension of the production cuts. However, now top OPEC officials are wondering if it will be enough. OPEC’s monthly report revised expected US shale growth sharply upwards, predicting output to increase 64 percent more than originally expected. That equates to projected growth from US shale of 950,000 bpd this year. OPEC fears that an extension will boost prices just enough to allow shale companies to lock in hedges once again, ensuring another wave of supply.

Tensions between Libya’s Presidential Council (PC) and the National Oil Corporation (NOC) are growing. The PC, which presently functions (that could change any day) as the head of state and military, and which is responsible for selecting members of the government, is ostensibly in control of investment decisions concerning Libyan oil. It was given this power via a resolution passed earlier this year. But the cracks in this set-up are already showing. The NOC is now accusing the PC of using the resolution to give German Wintershall a free pass in terms of compliance terms that it had agreed to with the NOC back in 2010. The NOC is now saying that the PC’s liberal stance on Wintershall is costing Libya $250 million because the dispute between the NOC and Wintershall has led to the shutdown of 160,000 bpd in production capacity. So, what does this mean for Libya? For the moment, production continues to rise. It’s now jumped to 780,000 bpd for the first time since 2014. And while elsewhere such a dispute might not rock any serious boats, in Libya this is the stuff of bloody changes in power. The NOC and PC are only hanging on to a modicum of control in the face of numerous militia factions that shift alliances with the wind. If the PC refuses to meet the NOC’s demand to revoke the resolution that gave it control over investment decisions, we could very easily see another shift in power in Libya. The NOC is bent on raising production a million bpd by the end of the year, and if it feels the PC is getting in its way, it may have the power to sideline it. The bottom line: The market responds in a knee-jerk fashion to any increase in production in Libya, but it’s important to keep in mind that Libya’s oil output on any given day is fragile at the very best.

For the first time in history, Tunisia has deployed armed forces to guard its oil and gas fields in the south, under threat from ongoing protests. Protests in the south have been going on for several years now, as the North African state tries to turn its economy around in the aftermath of the 2011 Arab Spring. But so far, planned government reforms have not been met with much enthusiasm. The south of the country still feels marginalized, and high unemployment—particularly among youth—and a perceived misdistribution of resource wealth are fanning some dangerous flames. Resource wealth, by regional comparison, is pretty low, but it’s enough to get the Tunisian youth up in arms. In 2013, Tunisia’s crude oil production hit a historic low of 60,000 bpd. By the end of 2016, it had fallen to 49,000 bpd. Right now, media puts production at 44,000 bpd, and if the youth is not appeased, even this paltry resource volume could be at risk.

Kenya’s first planned oil exports are also at risk. Residents of Kenya’s Turkana South have threatened to block the planned transportation of crude oil to Mombasa. Transportation of the oil from the Turkana fields is expected to start early next month, but locals are threatening to block it to buy time for more negotiations on revenue-sharing, job allocation and infrastructure deals. In mid-March, Kenya greenlighted a crude oil export agreement with Tullow Oil, Maersk International and Africa Oil, with pilot exports slated to start in June in a major milestone for the East African country, which was put on the oil map with a massive 2012 discovery. The companies have stored 70,000 barrels of crude oil, which will be used for part of the pilot program. Three companies announced that they will immediately begin transporting crude oil from the South Lokichar field in the prolific Turkana basin to the Kenyan Petroleum Refineries Limited (KPRL) at the port of Mombasa. From there, it will be exported to market in June—that is, unless protests get in the way. The South Lokichar field is being explored and developed by a joint venture between three companies. It is estimated that there are about a billion barrels of oil in the Lokichar area.