Russia’s invasion of Ukraine and global oil market scenarios
This new OIES presentation features a comprehensive empirical assessment of the implications of the Ukraine war on oil price and supply/demand dynamics via a number of forecast scenarios examining the size of disruption in Russian supplies, OPEC and non-OPEC supply response, the impact of the latest US announcement of SPR release and other uncertainty scenarios.
The analysis considers two principal 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 1.1 mb/d of Russian crude output by May 2022 that persists throughout our forecast horizon.
– 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 3.9 mb/d of Russian oil production by May 2022 that also persists throughout our forecast horizon.
Both scenarios are presented against a no-disruption baseline that corresponds to the latest forecast prior Russia’s invasion of Ukraine to assess the impact of the negative effects of Russia’s disruptions on price and supply/demand dynamics.
Under both principal scenarios the near-term price pressure is maintained till year-end on the lack of immediate replacement barrels to fill any potential gap from Russia’s disrupted supplies until at least H2 2022, before prices retreat towards $100/b in 2023 as negative demand responses on higher energy prices and wider macro disruptions begin to dictate the outlook. In the more severe disruption case, oil prices momentarily rise in the $150s, $31/b higher than the price peak of $125/b under our Reference case. Overall, depending on the size of disruption in Russian supplies and supply/demand outcomes in response, Brent price ranges between $95/b and $140/b in 2022 on annual basis and $74/b and $123/b in 2023.
Global oil demand loses between 1.1 mb/d and 2.5 mb/d of growth by 2023, with the y/y growth averaging 2.6 mb/d in 2022 and 1.5 mb/d in 2023 under Reference and 2.2 mb/d and 0.5 mb/d in 2023 under the Full curtailment case. OECD demand takes the hardest hit. The impact on non-OECD demand is more profound under the Full curtailment case. In terms of sectors the impact on fuel demand for industry appears the most affected. Our latest analysis sees the first detailed assessment of the impacts on OECD products demand, in which middle distillates and gasoline see massive revisions with their combined disruption under the more severe case reaching 1.2 mb/d.
On the supply side, a collective supply response could bring in total 3 mb/d of additional supplies ending 2022, suggesting that the market can manage a small to medium size disruption in Russian supplies, albeit near-term pressures particularly in H1 persist in both scenarios. On the contrary, a severe curtailment of Russian supplies would see the price pressure persisting for most of 2022, with replacement barrels struggling to fill any gap larger than 4 mb/d even in 2023. The US SPR release could offset some of this pressure in the near-term, but the impact on prices appears to be shortlived and largely dependent on the size of the Russian supply disruption.
The balance of risks to the global supply/demand balance points towards tight market conditions in 2022 with the prospect of a more balanced market and surpluses reappearing in 2023. Our best-case scenario under the Reference sees the market only balanced in 2022 by 0.15 mb/d and a small surplus of 0.63 mb/d building in 2023, offering some relief to OECD stocks that draw massively for most of 2022. The more severe case under Full curtailment however sees the market deficits persisting in 2022 and averaging -1.1 mb/d for the year, before the market balances in 2023 to 0.05 mb/d. In this scenario, OECD stocks draw massively to multiyear low levels.