Crude oil prices slip on receding fears of output cut by OPEC Plus

Crude oil prices fell on Wednesday, taking a breather from a near 4% surge the previous day, on receding fears of an imminent output cut by the Organization of the Petroleum Exporting Countries and allies, a group known as OPEC Plus.

Global benchmark Brent crude futures fell to US$99.82 a barrel by 0337 GMT, after rising 3.9% and WTI futures declined to US$93.47 a barrel, having jumped 3.7% on Tuesday.

Both contracts soared on Tuesday after Energy Minister of Saudi Arabia flagged the possibility of supply cuts to balance a market it described as "schizophrenic", with the paper and physical markets becoming increasingly disconnected.

"While Abdulaziz bin Salman's comment may have achieved more than putting a floor under crude prices, we expect it to follow the law of diminishing returns, unless it is followed up by more signals or action from OPEC Plus to restrain output," said Vandana Hari, founder of oil market analysis provider Vanda Insights.

With OPEC Plus already delivering about 2.8 million barrels per day less than its monthly target, cutting production is going to be more complicated than usual, Hari added.

Potential OPEC Plus production cuts may not be imminent and are likely to coincide with the return of Iran to oil markets should it clinch a nuclear deal with the West, nine OPEC sources told Reuters on Tuesday.

A senior US official told Reuters on Monday that Iran had dropped some of its main demands on resurrecting a deal. 

"Tuesday's rally was overdone as many investors knew it would take several months for Iranian oil to flow into the international market even if an agreement to revive Tehran's 2015 nuclear deal was made, meaning OPEC Plus would not trim output so quickly," said Kazuhiko Saito, Chief Analyst at Fujitomi Securities.

"Still, there is not much room for the market's downside due to robust heating fuel demand for the winter," he said, citing that the recent rally in the US heating oil market and surging natural gas prices boosted expectations for stronger heating oil demand and tighter crude supply.

US gas prices shot above US$10 for the first time in about 14 years due to a surge in prices in Europe, where tight supplies persist.

Underlining tight supply, US crude stockpiles fell by about 5.6 million barrels for the week ended August 19, according to market sources citing American Petroleum Institute figures on Tuesday, against analysts' estimate of a drop by 900,000 barrels.

But gasoline inventories rose by about 268,000 barrels, while distillate stocks increased by about 1.1 million barrels.

Europe inching towards worst energy crisis

The International Energy Agency (IEA) has warned Europe is facing a red alert over its gas consumption and significant additional reductions are needed to prepare the continent for a tough winter ahead.

The warning comes as Russian gas exports to the continent have decreased in capacity and amid maintenance work on the main pipeline to Germany (Nord Stream 1). The IEA fears that further gas cuts cannot be ruled out. 

Experts argue the European Union is struggling to secure alternatives to Russian supplies but has approved another 500 million euros in arms to Ukraine, whereby a push towards a peace settlement may save the bloc a lot of breathing space on its gas stocks, instead of the panic it finds itself in. 

The IEA itself which serves as the west’s energy watchdog says efforts to boost supplies are still falling short and the 27-member bloc needs stricter measures, such as restricting air conditioning demand (during the current heat wave in Europe) and auctioning gas supplies to industry.

Dr. Fatih Birol, the Executive Director of the IEA has said there is a global energy crisis but warned the situation is especially perilous in Europe, which is at the epicenter of the energy market turmoil. He has expressed concern about the months ahead for the continent. 

The IEA has acknowledged there has not been enough progress by the EU to ween itself of Russian gas especially on the demand side, to prevent Europe from finding itself in an incredibly precarious situation.

It says any further cuts of Russian natural gas flows to Europe, combined with other recent supply disruptions, are a red alert for the European Union, adding that as we get closer to next winter, we are getting a clearer sense of what Russia may do next. The next few months will be critical, the organization warned. 

Moscow has strongly rejected any allegations that it has been using its gas supplies for political purposes. Experts have also argued that it is not in the Kremlin’s interest to cut gas supplies as Russia would lose out financially. 

Nevertheless, Brussels the headquarters of the EU is reportedly preparing to tell the bloc members to cut gas consumption immediately, warning that without increased preservation the continent risks running short of the vital commodity this winter. 

Reports have surfaced that the European Commission will provide members with voluntary gas reduction targets by next week, which cautions that targets will be made mandatory in the event of severe disruption to supplies.

Acting jointly now will be less disruptive and costly, facilitating solidarity and avoiding the need for unplanned and uncoordinated actions later in a possible crisis situation with gas reserves running low.

The IEA warns that efforts to diversify away from Russian gas are no longer enough on their own and that Europe faces the real prospect of rationing its energy unless demand is restricted in order for storage facilities to be filled ahead of the long winter season. 

Birol says he has spoken to EU officials urging them to do all they can right now to prepare for a long, hard winter. He said, “Europe is now forced to operate in a constant state of uncertainty over Russian gas supplies, warning that we can’t rule out a complete cut-off.

The irony is that the EU initiated gas crisis by imposing unprecedented economic sanctions on Russia including hundreds of individuals, businesses, companies, entities, flights, and oil by the end of 2022. In March the bloc said it would reduce gas imports by two-thirds within a year, but there have been disagreements among EU members about this. 

The EU is evidently heavily reliant on Russian gas, yet it has threatened Moscow and at the same time, appears to have shot itself in the foot with its sanctions policy.

An EU last week recommended limiting central heating and cooling in buildings as well as the exemption of coal power stations from its target of emissions reductions.

One EU official has said talks are ongoing over what punitive measures can be enforced if mandatory targets set by the EU to cut gas are not met among member states. 

Europe had relied on Russia for about 40% of its gas but since Russia’s military intervention in Ukraine, Western sanctions have disrupted supplies. The continent imported a total of 155 billion cubic meters of gas from Russia in 2021 and consumes close to 400 billion cubic meters of gas in total during a normal year.

A new EU gas plan issues a warning that continued cuts to Russian gas supplies could lead to a drop in the bloc’s GDP by up to 1.5%, depending on the level of disruption.

Birol said, “Flows have been halted through Nord Stream [1], the biggest single gas pipeline between Russia and Europe, for what Russia says is planned maintenance that is due to end on July 21, 2022. Russia had already significantly reduced the flows coming through Nord Stream in June, and it remains unclear whether they will resume and if so, at what level, after the stipulated deadline.”

The maintenance work is routine procedure that is carried out every year and it’s not uncommon that the work would take longer than ten days. Kremlin spokesperson, Dmitry Peskov, has rejected accusations that Russia would use its gas exports to put pressure on European governments.

Nevertheless, the IEA has offered thorough guidelines and steps to the EU on how to fill European gas storage to adequate levels before winter; starting with the reduction of Europe’s current gas consumption, and putting the saved gas into storage. 

Among the advice is to bring down household electricity demand by setting cooling standards and controls. Government and public buildings should take the lead on this to set an example while campaigns should encourage behavioral changes among consumers.

If the measures proposed by the IEA are not implemented now, Europe will be in an extremely vulnerable position and could well face much more drastic cuts and curtailments later on,” the agency warned. 

It goes on to say that in addition to the measures proposed, “European governments also need to prepare the people of Europe for what may be coming. Public awareness campaigns in the context of an energy crisis have been successful previously in reducing short-term energy demand by several percent.”

According to the IEA, since Russia’s military operation in Ukraine, the amount of revenue that Moscow has collected from exporting oil and gas to Europe has doubled compared with the average of recent years – to US$95 billion. 

“The increase in Russia’s oil and gas export revenues in just the last five months is almost three times what it typically makes from exporting gas to Europe over an entire winter.” the IEA says. 

The agency warns that should Russia decide to completely cut off gas supplies before Europe can get its storage levels up to 90%, the situation will be even more grave and challenging.

The warnings and plans for Europe to cope with enough heat in the winter offers an idea on how reliant the EU is on Russian gas and how fragile the situation may become in wintertime. 

Cool heads are required at such a delicate time. Perhaps a peace deal, which the US-led NATO alliance doesn’t appear to care about, is just what’s needed.

 

European leaders visit Ukraine

I am a bit surprised but a lot disturbed to read this news. German, Italian and Romanian leaders visited a small town Irpin to show support for Ukraine. However, little effort is being made to negotiate ceasefire. 

I also fail to understand why people of Ukraine have been made scapegoat to push Russia out of the energy market. United States has done this to Iran, Iraq, Libya and Venezuela in the past.

French President Emmanuel Macron said Thursday that there are signs of war crimes in a Kyiv suburb following “massacres” by Russian forces. He spoke in the town of Irpin while on a visit with the German, Italian and Romanian leaders to show support for Ukraine.

He denounced the “barbarism” of the attacks that devastated the town, and praised the courage of residents of Irpin and other Kyiv region towns who held back Russians forces from attacking the capital.

The four European leaders arrived earlier in Kyiv to the sound of air raid sirens as they made a high-profile show of collective European support for the Ukrainian people as they resist Russia’s invasion.

The visit, which includes a planned meeting with President Volodymyr Zelenskyy, carries heavy symbolic weight given that the three Western European powers have faced criticism for not providing Ukraine with the scale of weaponry that Zelenskyy has been asking for.

They have also been criticized for not visiting Kyiv sooner. In past weeks and months a number of other European leaders had already made the long trip overland to show solidarity with a nation under attack, even in times when the fighting raged closer to the capital than it does now.

The French president’s office said that Macron, German Chancellor Olaf Scholz and Italian Premier Mario Draghi, representing the three largest economies in Europe, traveled to Kyiv together on a special overnight train provided by the Ukrainian authorities.

President Klaus Iohannis of Romania — which borders Ukraine and has been a key destination for Ukrainian refugees — arrived on a separate train, tweeting on arrival, “This illegal Russian aggression must stop!”

“It’s a message of European unity for the Ukrainian people, support now and in the future, because the weeks to come will be very difficult,” Macron said.

The Russian forces are pressing their offensive in the eastern Donbas region, slowly but steadily gaining ground on the badly outmanned and outgunned Ukrainian forces, who are pleading for more arms from Western allies.

Several air raid sirens rang out while the European leaders were in their hotel preparing for the rest of their visit, and Kyiv authorities urged people to seek shelter. Such alerts are a frequent occurrence.

As he left the hotel, Macron, putting his hand on his heart, said in English, “I want to show my admiration for the Ukrainian people.”

German news agency dpa quoted Scholz as saying that the leaders are seeking to show not only solidarity but also their intent to keep up financial and humanitarian help for Ukraine, and a supply of weapons.

Scholz added that this support would continue “for as long as is necessary for Ukraine’s fight for independence.”

Scholz said that the sanctions against Russia were also significant and could lead to Moscow withdrawing its troops, according to dpa.

Scholz, Macron and Draghi have been criticized not only for helping too little but for speaking to Russian President Vladimir Putin.

Many leaders and regular people in the Baltic and Central European nations, which were controlled by Moscow during the Cold War, believe that Putin only understands force, and have viewed the efforts by Macron and others to keep speaking to Putin following his invasion as unacceptable.

Hopes were high among Ukrainians that the visit could mark a turning point by opening the way to significant new arms supplies.

Tamara Malko, a resident of Pokrovsk, in the Donestsk region of eastern Ukraine, said Macron and Olaf had been “very cold” toward Ukrainians so far, and hoped for a change.

“We want peace very much, very much and have high hopes for Macron and Scholz,” she said. “We want them to see and understand our pain.”

Luhansk regional governor Serhiy Haidai said the visit will not bring anything if the leaders ask Ukraine to conclude a peace treaty with Russia that involves giving up territory. He said that is something Ukrainians would never accept.

“I am sure that our president, Volodymyr Zelenskyy, is not going to make concessions and trade our territories. If someone wants to stop Russia by giving them the territories, Germany has Bavaria, Italy has Tuscany, the French can concede Provence, for instance,” he said.

“Listen, this is Russia. These are wild people. Today it will be one territory, tomorrow another one, the day after tomorrow another. And another thing: Many heroes of Ukraine died protecting the country as a whole. Nobody will forgive us if people die but we make concessions to the aggressor.”

The visit comes as EU leaders prepare to make a decision June 23-24 on Ukraine’s request to become a candidate for EU membership, and ahead of an important NATO summit June 29-30 in Madrid.

Also Thursday, NATO defense ministers are meeting in Brussels to weigh more military aid for Ukraine. On Wednesday, the US and Germany announced more aid, as America and its allies provide longer-range weapons they say can make a difference in a fight where Ukrainian forces are outnumbered and outgunned by their Russian invaders.

On Tuesday, during a trip to Ukraine’s neighbors Romania and Moldova, Macron said a “message of support” must be sent to Ukraine before EU heads of state and government “have to make important decisions” at their Brussels meeting.

“We are in a moment where we need to send clear political signals — we, Europeans, we the European Union — toward Ukraine and the Ukrainian people,” he said.

Macron is deeply involved in diplomatic efforts to push for a cease-fire in Ukraine that would allow future peace negotiations. He has frequent discussions with Zelenskyy and has spoken on the phone several times with Russian President Vladimir Putin since Putin launched the invasion in late February.

Scholz had long resisted traveling to Kyiv, saying he didn’t want to “join the queue of people who do a quick in-out for a photo opportunity.” Instead, Scholz said a trip should focus on doing “concrete things.”

Germany on Wednesday announced that it will provide Ukraine with three multiple launch rocket systems of the kind that Kyiv has said it urgently needs to defend itself against Russia’s invasion.

 

Ukraine conflict reshaping global oil markets

According to a Reuters report, Russian invasion of Ukraine has reconfigured the global oil market, with African suppliers stepping in to meet European demand and Moscow, stung by Western sanctions, increasingly tapping risky ship-to-ship transfers to get its crude to Asia.

The reroutings mark the biggest supply-side shakeup of the global oil trade since the US shale revolution altered the shape of the market around a decade ago and suggest Russia will be able to navigate a European Union (EU) oil ban, provided Asia and China continue to buy its crude.

Sanctions imposed on Moscow after the conflict in Ukraine kicked off in February, including a US ban on its oil imports, have prompted Russia to pivot away from Europe, where its crude is shunned, to customers in India and China who are picking up cargoes at a steep discount, according to industry data and traders.

Russian exports were back to pre-invasion levels in April, according to data from the Paris-based International Energy Agency and oil prices have stabilized around US$110 after hitting a 14-year high above US$139 a barrel in March.

Even if the European Union agrees to an oil ban in its next round of Russian sanctions, analysts said the impact could be tempered by demand from Asia.

"Unless the West puts diplomatic pressure on Asian buyers, we do not see the supply gap widening and oil prices spiking," said Norbert Rücker of Julius Baer.

A complex patchwork of US, EU and British sanctions have prohibited Russian-owned or flagged ships from calling at ports meaning that some of the increased trade to Asia is being facilitated via ship-to-ship transfer at sea -- a costly process where the risk of spills is greater.

Overall, the flow of Russian oil to Asia via the sea has jumped at least 50% since the start of the year, according to tanker-tracker Petro-Logistics and other data.

Transfers between vessels, which account for a small fraction of the overall sea trade, have shifted away from the Danish coast to the Mediterranean Sea to avoid sanctions and protests.

"Ship-to-ship (STS) transfers were common in Danish waters, at the entry point of the Baltic Sea," Petro-Logistics President Mark Gerber told Reuters. "Those are not happening anymore; hence the STS trend of sanctioned tanker to non-sanctioned tanker increasing in the warmer and friendlier Mediterranean waters."

Gerber put the volumes of Russian crude and products being transferred between tankers in the Mediterranean at about 400,000 barrels per day (bpd), of which the majority is going to Asia, adding to the 2.3 million bpd going directly.

In January, before the invasion, around 1.5 million bpd were being sent directly to Asia.

Russian oil is loaded on Aframax or Suezmax tankers that carry less than one million barrels and it is transferred at sea to larger vessels that can take 2 million barrels, making shipping more cost effective, traders said.

The seaborne volumes are only part of the total exports from Russia. Including pipeline supplies, total Russian crude and products exports increased to just above 8 million bpd in April, back to the pre-invasion rate.

To compensate for the loss of Russian oil, European refiners have been turning to imports of West African crude, which are up 17% in April compared to the 2018-2021 average according to Petro-Logistics.

Eikon data also shows an increase and indicates 660,000 bpd mostly from Nigeria, Angola and Cameroon is arriving in northwest Europe in May, with three cargoes of Nigerian Amenam coming compared to one in February.

Volumes of West African crude to India, meanwhile, have nearly halved, according to Gerber, with 280,000 bpd delivered in April from 510,000 bpd in March as Delhi switches to Russian supply.

With European demand red-hot, the prices of Nigerian light, sweet crude grades in particular are hitting record highs, according to traders, with Forcados crude for example offered at a premium of at least US$7 to Brent.

Supply from North Africa to Europe is up by 30% since March, Petro-Logistics said. Of this, Eikon data indicates arrivals into northwest Europe from Egypt's Sidi Kerir port, which analysts say is likely Saudi crude, will almost double versus March to above 400,000 bpd in May.

The United States has also boosted supply to Europe. European crude imports in May from the US on a delivered basis are up over 15% versus March, according to tracking company Kpler, the highest monthly pace in its records. Europe has discharged about 1.45 million bpd of crude from the United States.