Russia’s invasion of Ukraine and oil market dynamics

This new OIES presentation assesses the implications of the tightening sanctions on Russian oil for crude and product markets, as well as the short-term oil market outlook in terms of supply/demand and price dynamics. Some key points:

  • The immediate restrictions on Russian crude and products flows remain driven by self- sanctioning. But the EU’s recently agreed year-end embargo on Russian oil and prohibition of EU operators from insuring and financing the transport of Russian oil to third-party countries are bound to change this, albeit the full impact of the latest sanctions on Russian oil flows may not be felt until 2023.
  • The redirection of Russian crude to Asia and the Med, the EU intake holding steady at 2.1 mb/d in March/May following an initial m/m drop by 0.48 mb/d, and lower refinery output amid a slowdown in domestic demand have led to Russian crude exports jumping to 2019 high levels at 5.4 mb/d from 4.8 mb/d in February.
  • Russian crude-on-water has risen to record levels led by Urals, as crude exports shifted from short-haul to long-haul. Helping this redirection of trade flows has been the offer of Russian Urals at a large discount and easier payment conditions with India imports of Russian crude already nearing 1 mb/d, China’s appetite growing towards H2 as lockdowns ease and the Med steadily ramping up intake of discounted Urals (mainly Italy and Turkey). In response, US and West African Crude (WAF) crude is now shifting from Asia to Europe to fill the supply gap of Russian barrels, while intake from regional domestic producers is also on the rise. This is changing dramatically European refineries’ diet.
  • The EU ban on Russian products adds to the pressure in Europe as distillate stocks remain tight. Russian diesel continues to flow to Europe with markets pricing non-Russian diesel at a premium. Also, the definition of what constitutes non-Russian cargoes has become stricter with more rigorous restrictions on suppliers on the origin of their products.
  • European product markets saw some relief by hiking imports from the US, the Middle East and India, but the products market in the US is also tight due to the refinery closures in 2020/2021 and shortages of key feedstock from Russia due to sanctions. Asia markets are also becoming increasingly tight as regional demand picks up amid export quotas in China and refiners in India are at, or near, maximum capacity. The products market tightness that started, even before Russia’s invasion of Ukraine, is spreading to other products from diesel to jet to gasoline.
  • The supply disruption in Russian supplies remains limited so far and for now we expect crude shut-ins in H2 to reach between 1.5 mb/d and 2.6 mb/d towards year-end with our reference case favouring the high disruption scenario. The risk of bigger disruption is rising by the day due to self-sanctioning, the European ban on Russian seaborne imports, EU operators prohibited from insuring and financing transport of Russian oil (including reinsurance), refusal of many banks to finance Russian-related commodity transactions, and traders not renewing term contracts with Russian producers.
  • Global supplies find little comfort as most OPEC+ struggle to meet their quotas, the prospects of reaching an Iran nuclear deal have diminished, US shale growth remains constrained by surging inflation and supply-chain bottlenecks and companies sticking with plans to keep capital spending in check. In the near-term, the crude market could find relief from the continued SPR releases, but this will be temporary.
  • On the demand side, China’s post-lockdown recovery and pent-up demand in advanced economies support the near-term outlook, but risks are tilted to the downside and the risk of demand responses to higher oil prices and slower economic growth increases in 2023. Our global demand forecast sees y/y growth of 2.2 mb/d in 2022 and 1.4 mb/d in 2023, albeit growth outcome in Q3 will be critical to the outlook.
  • The oil market is still seen at a small surplus in 2022 at 0.38 mb/d but market deficits are expected to re-emerge sooner from Q4-onwards deepening the overall deficit in 2023 to -0.58 mb/d. OECD stocks remain under severe pressure throughout the remainder of the year, before the draws reverse ending-2022 with the deficit easing only slightly in 2023. Our reference Brent forecast stands at $112.8/b in 2022 and $102.8/b in 2023, with the price pressures sustained in Q2 and Q3 before easing towards next year. Oil price volatility remains high throughout, but the balance of risks is tilted to the downside in 2023.

By: Bassam Fattouh , Andreas Economou