Oil prices are a huge wild card for the global economy, and could be about to get much more volatile as Europe prepares to end seaborne imports from Russia in December. Since Russia invaded Ukraine last March, oil prices have traded in a wide range. International Brent crude spiked to about $140 per barrel as Russia launched its invasion in March and slid below $85 per barrel in September. On Wednesday, Brent crude futures were trading at about $95.89 per barrel . Analysts do not expect the world to face an oil shortage, but they do expect higher prices in 2023 as Europe cuts back on Russian oil and then imposes an embargo on Russian refined products early next year. “There are three big oil producers in the world, and two of them are Russia and Saudi Arabia,” said Dan Yergin, vice chairman at S & P Global. “Depending what happens in December, we may have an even more difficult oil market, in which cooperation is going to be important.” The European ban could be the next drama to hit the oil market, which has been tumultuous since the war in Ukraine forced a new order in global energy markets. Scrambling to fill the gaps Russia was Europe’s chief supplier of energy. The U.S., one of the big three producers, and other countries have scrambled to send supplies of liquified natural gas and refined crude products to fill the gaps. The oil market faces the push-pull of less supply but also weaker demand. China’s Covid lockdowns have affected demand, and fears of a global slowdown have kept producers cautious. U.S. oil production has increased, but it is still not at pre-pandemic highs. Producers have been reacting to the demands of Wall Street to keep expenses under control and give money back to shareholders. Barclays energy analyst Amarpreet Singh said the fact the U.S. producers are not pushing up their output in a bigger way could be one reason that OPEC+, which includes Russia, has said it is cutting back production by 2 million barrels a day . “Because U.S. producers are not responding, in a way, they used that to give them leeway to be more proactive,” he said. In the past, OPEC+ has been concerned that U.S. production would ramp up in response to high prices and then add enough supply that it was a catalyst to drive prices lower. Events that could cause volatility Saudi Arabia is the de facto leader of OPEC, and its energy minister said the decision to produce less was necessary to guarantee the kingdom would have sufficient spare capacity if Russian sanctions lead to a major decline in oil supplies. Speaking Tuesday, Prince Abdulaziz bin Salman also took a swing at the U.S. for using millions of barrels a day from the Strategic Petroleum Reserve to prevent prices from rising sharply. Barclays’ Singh said Europe’s planned Dec. 5 cut-off of Russian crude is the big event on the horizon for energy markets, but there are other issues that could create volatility as well. “We’ve highlighted heightened turbulence … because of the uncertainties around what happens with Russian supplies and what happens with Covid in China and what happens with the global economy that is facing the fastest pace of central bank rate hikes that we’ve seen in decades,” he said. “These are all factors.” Singh notes there could be a significant drop in Russian oil in coming months as European restrictions on imports of oil and refined products, like diesel, take hold. Already, he notes Russian crude and product supply has dropped to an average 7.5 million barrels a day in September, from 8.1 million barrels a day before it invaded Ukraine. Barclays expects about 1 million barrels of Russian oil to come off the market, but Singh said his estimate is low compared with others. He noted the International Energy Agency and the U.S. Energy Information Administration expect Russian oil supplies to drop by 1.5 million barrels a day and 1.6 million barrels, respectively. “If you look, so far Russia has been able to redirect supplies that would traditionally go to Europe or the U.S. relatively better than most projections from earlier this year,” he said. He noted that China and India have increased their purchases of Russian oil, but so have other countries, like Turkey. Russia exported about 1.7 million barrels a day of oil to Europe and the U.K. in August, according to the IEA. In January, those imports totaled 2.6 million barrels a day. The U.K. has already eliminated Russian imports. “If we finally lose meaningful amounts of Russian crude oil that would be significant for the market,” said John Kilduff, partner with Again Capital. “There’s still a chance Europe can blink, depending on how bad things get. I don’t think you can rule that out as a scenario.” So far, there’s no indication Europe will reverse course on the ban. Europe has managed to put gas into storage for the winter, but the weather will be a factor for the European Union, and there could be switching to oil if gas prices skyrocket again or supplies are short. “You have the feeling that nobody has their arms around the whole situation and even if the pressures in the gas market ease up and are not as bad this winter as they could be, the political pressures are very intense on governments,” said Yergin. According to JP Morgan energy analysts, a key factor for the global oil price centers on how much tanker capacity Russia is able to commandeer. Russia is about 1 million barrels a day short of tanker capacity that can be used to ship its oil after the Dec .5, and the analysts note that starting that day any ship carrying Russian crude that is sold above a pre-determined price cap would be barred from European shipping and finance “Russia has made it clear that it will not comply with the US-led price cap and will try to legally find alternative buyers for its oil on vessels not requiring Western services,” according to the JP Morgan analysts. But that leaves Russia short of tankers, and the analysts say it will take until 2024 for Russia able to find sufficient tanker capacity to deliver all of its crude. Russia is also short of about 2.5 million barrels a day of tanker capacity for refined products, and that shortfall is likely to continue until 2025. The analysts note that Russia could increasingly make ship-to-ship transfers, or use a “dark fleet” that Iran and Venezuela used to skirt bans on their oil. “Consequently, until 2024 we believe oil price will be strongly influenced by the availability of tankers that are willing to transport Russian oil rather than global supply-demand fundamentals, keeping oil price elevated. We hold our price view of $100/bbl in 4Q22 and $98/bbl in 2023,” the analysts wrote. A higher floor for prices The relationship of the three biggest producers to the oil market has made the price outlook even more difficult to predict, but analysts agree there is a higher floor for prices than there had been. “$80 is the new $60,” said Francisco Blanch, head of global commodities and derivatives research at Bank of America. Blanch commented on the price of Brent. West Texas Intermediate futures are trading about $8 a barrel lower than the global benchmark. Blanch said while the floor for oil prices is now higher, he still has a Brent forecast for $100 a barrel next year with a spike toward $110 at the middle of the year. “OPEC+ cut to keep oil over $80 a barrel. We also believed the government in the U.S. was going to put a floor under oil prices by refilling the SPR,” said Blanch. “I’m not sure it’s going to work or not. One thing is it’s going to discourage people from hedging below $70 a barrel.” Blanch said the energy crisis in Europe could push the U.S. to become more energy independent. “Russia’s misstep with Europe opens the door for the U.S. to grow its international market share,” he said. “Europe is going to buy more from the U.S. There’s going to be a very large spread between European energy prices and U.S. energy prices.” Singh expects Brent at $98 a barrel next year, but that could be too high if there is a recession that hits demand hard. “If demand is 1 million [barrels a day] below our forecast, there is $15 downside. If it is 2 million barrels below forecast, then it is $25 a barrel,” he said.
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