OIES Oil Monthly – Special Issue 12

This month’s OIES Oil Monthly Special Issue assesses the implications of the Ukraine war on our short-term oil market outlook for market balances and prices to 2023.

The analysis considers two scenarios. A Reference case in which self-sanctioning measures and obstacles in redirecting Russian crude flows due to financing and shipping constraints results in a loss of 1 mb/d of Russian supplies in March 2022, that persists throughout our forecast horizon but it is not exceeded; and a Full curtailment case either due to an extension of direct sanctions on Russia or a retaliatory tit-for-tat oil embargo from Russia that results in the loss of 4 mb/d of Russian supplies by May 2022 and corresponds to an 85 per cent decline in Russia’s oil exports relative to February. Both scenarios are presented against a no-disruption baseline to assess the impact of the negative effects of Russia’s disruptions on supply/demand and price dynamics.

  • Depending on the size of the supply disruption and its duration, we estimate that global oil demand could lose between 1 mb/d and 2 mb/d of growth in 2022 and 2023. OECD Europe appears the hardest hit region throughout, contributing to total OECD demand losing 0.5 mb/d of growth in our reference case and the losses extending to 1.2 mb/d in the worst case, as y/y growth falls to negative territory in 2023. The negative impacts in non-OECD demand become more acute towards the end of the year and extend to 2023 with some 0.9 mb/d of growth at risk. Nearly half of the total loses in global oil demand will be impacting fuels for industrial use, followed by the demand for transport fuels and in particular road fuels and jet.
  • Global oil supply could fail to return to pre-COVID levels before 2024, as the expected response to a severe shock will be limited in the short-term. Analysis shows that production losses from Russia of up to 1 mb/d will be manageable in the short-term, but a more severe supply shock will need a collective response from the supply side, albeit this will be extremely difficult to achieve.

So far, OPEC+ has stuck to the current agreement of gradually releasing barrels to the market.  As most OPEC+ producers near their maximum capacity limits, we expect total OPEC+ excluding Russia to be able to return another 1.6 mb/d between March and September 2022, 0.6 mb/d below target but still able to replace 39 per cent out of the total 4 mb/d of Russian crude supplies at risk. Despite new obstacles emerging with regards to the Iranian nuclear deal, if an agreement is reached, the ramping of Iranian production will improve balances and moderate prices but only marginally, notwithstanding the impact on sentiment. Outside OPEC+, our full curtailment scenario sees non-OPEC production responding to elevated prices by an additional 0.6 mb/d of growth by 2023.

  • The Russian oil disruption is also having wide repercussions on products markets. For European refineries which rely heavily on Russian Urals for their diet, the search for alternatives grades has already started, but given the tightness of the market, this is a challenging task and refineries are being forced to rely on local or regional crudes and could cut runs, disrupting the supply of products such as diesel and gasoline. Distillates markets are already under severe pressure with the any relief for European distillates from Russia unlikely, as self-sanctioning extends to products and as Russian refineries themselves could cut runs as they fail to find buyers. The very high prices in Europe are opening the arbitrage from Asia, although distillates markets in Asia are also tight. The impact on products also extends beyond distillates and the US ban on Russian supplies will also impact US refineries which rely on Russian crude and unfinished products as key ingredients to US refineries’ diet.
  • Oil prices and volatility will remain on edge in 2022 with the Brent price outlook ranging between $102/b and $130/b on an annual basis. The price impact of supply disruptions will be sizeable in the near-term, as supply/demand responses are limited resulting in elevated geopolitical risk pressures persisting to Q1 2023 before easing in 2023. Market responses are expected to significantly ease the price pressure in 2023, with Brent falling below $100/b by year end.
  • The most plausible scenario for 2022 is for the market to remain in deficit, as previously expected surpluses are now nearly eliminated. Our best-case scenario now sees supply/demand conditions only balanced in 2022, with the risk of deficits building in an already tight stocks environment across all quarters. The supply/demand gap in 2022 ranges between -1.9 mb/d and 0.5 mb/d, with the prospect of a more balanced market reappearing again towards the end of 2022 and in 2023.

Please contact Andreas Economou for more information on the OIES Oil Monthly.