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The news that Russia and Ukraine had made progress in the peace talks in Istanbul was positively perceived by the oil market, and oil prices moved to decline early last week: Brent fell by 1.64 percent to $107.7 a barrel on Tuesday, West Texas Intermediate, or WTI, by 1.62 percent to $104.24 a barrel.
But the euphoria did not last long: the next day, March 30, the Brent and WTI prices went up by 3.5 percent to $111.4 and $107.8 a barrel, respectively. The reason: American Petroleum Institute’s crude oil inventories data published a night before showed a drop of 3 million barrels; this is three times higher than the figure expected by the analysts.
Oil prices also rallied after the U.S. Energy Information Administration, or EIA, confirmed a crude inventory draw of 3.4 million barrels for the week ending March 25. The EIA reported a build-up in gasoline and middle distillates inventories, at 800,000 barrels and 1.4 million barrels, respectively. Prices were also fueled by the beginning of the driving season in the Northern Hemisphere.
But the main driver of that day was the outcome of the OPEC+ meeting. Recent statements by group representatives suggest that OPEC+ will keep the status quo and increase production according to the previously agreed plan.
Referring to the status quo, Saudi Energy Minister Prince Abdulaziz bin Salman said in an interview with CNBC, “when it comes to OPEC, I would take that privilege of saying I’ve been at it for 35 years, and I know how we managed to compartmentalize our political differences from what is for the common good of all of us.”
He added, “culture is seeped into OPEC+, so when we get into the OPEC meeting room or building, everybody leaves his politics at the door, and that culture has been with us.”
Indeed, the OPEC+ meeting on March 31 concluded that no change in production plans is needed, agreeing to lift the group’s production by another 432,000 barrels per day, or bpd, starting in May. The decision is essentially in line with the market expectations.
OPEC’s Joint Ministerial Monitoring Committee agreed on the recommendation in less than 20 minutes. The OPEC+ meeting kicked off immediately after, lasting just 12 minutes, further signaling the group’s solidarity on its production strategy.
The 27th OPEC+ Ministerial Meeting noted, “continuing oil market fundamentals and the consensus on the outlook pointed to a well-balanced market. The current volatility is not caused by fundamentals but by ongoing geopolitical developments.”
Nevertheless, oil prices dropped on March 31 as President Joe Biden announced the largest ever Strategic Petroleum Reserve, or SPR, crude release totaling up to 180 million barrels. The SPR release is expected to continue for at least six months adding 1 million bpd. Brent crude was down 4.88 percent from Wednesday’s closing level and was trading around $107.9 a barrel, and WTI was down 6.99 percent to $100.3 a barrel.
The other factor contributing to the downward trend is the continuation of the Coronavirus outbreak in China, accompanied by new lockdowns. Preliminary estimates show that the decline in oil consumption due to the closure of large cities and industrial centers in China could reach up to 200,000 bpd.
In addition, significant discounts on Russian oil led to cheap volumes in the market. In fact, Russian oil is now trading at a discount of around 20 percent. India is an active buyer, and Indonesia also has the intention to buy.
It is believed that China is also purchasing additional volumes without announcing them. Together, all these factors brought down the overall price level.
Given that there is no sign of a complete de-escalation of the conflict in Ukraine, three most crucial factors will influence oil prices: news about SPR release in the U.S., Houthi attacks on Saudi Arabia oil facilities, and lockdowns in China.
Soon, geopolitics will determine further development in the oil market. Much will also depend on whether the Europeans impose an embargo on Russian oil exports following the U.S. According to Russian Deputy Prime Minister Alexander Novak, in scenarios of a complete disruption of supplies from Russia, oil prices can soar to $300 a barrel. A price shock could trigger a global recession.
Even in the absence of tough sanctions against Russian oil exports, market prices will remain at a high level until the end of the year. The reason for this will be the growth of the oil deficit against the background of falling exports from Russia.
Indeed, the export of Russian oil has noticeably decreased. According to Bloomberg, from March 17 to March 23, the average daily supply of Russian crude totaled 495.3 thousand tons, or 3.63 mbpd, which is 26.4 percent (around 2 mbpd) less than a week earlier.
The immediate bans on importing Russian oil were introduced only by the U.S. and the U.K. However, many companies from other countries have also stopped purchasing oil from Russia. Shell and Total announced the intention to abandon Russian oil gradually.
However, Russian oil exports to China and India will increase in the future due to significant discounts. Experts believe that due to sanctions, on average, from 1 to 2 mbpd of Russian oil, including oil products, will leave the market. In this case, the shortage of crude oil will increase and trigger a surge in prices, reaching $150 a barrel if the situation deteriorates further.
• Dr. Namat Al-Soof is an Iraqi oil expert with long experience in upstream and market analysis. He held senior analyst positions at OPEC, IEF in Riyadh, and OPEC FUND for International Development. Currently, he is a consultant to a number of companies in the oil industry.