Dubai: With the increasing risk of Russian crude supply being wiped out, oil prices might remain higher for longer and pose a huge challenge to oil-reliant economies.
Brent crude price surged past $130 a barrel on Tuesday – its highest since 2008 – after US President Joe Biden announced that the US would ban crude, gas and coal imports from Russia. The UK will phase in an import ban on Russian oil with the plan to take none by the end of 2022.
“The more you go east, the more you see greater dependence on Russia’s energy exports – UK can afford to take the US line because they are shielded from Russian exports unlike Germany,” said Carol Nakhle, founder and CEO of Crystol Energy, in an interview with Gulf Intelligence. “Prices heading up can be quite frightening, but today’s oil importers in the global economy are not the same as they were in the 1970s.”
“If there are greater political gains to be achieved from this, the OECD (Organisation for Economic Co-operation and Development) economies at least can afford higher prices than what we are seeing today,” said Nakhle.
Over the last few weeks, US and the EU have been ratcheting up their economic pressure on Russia by imposing sanctions across various sectors including banking, aviation and energy.
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“Although the impact on US supply may be limited, prices are soaring because the ban makes it more of a challenge to trade in Russian oil and more likely that other countries may follow suit,” said Bjørnar Tonhaugen, head of oil markets at Rystad Energy.
Russia usually exports 4.8 million barrels per day (bpd) of crude oil to the market, and another 1.4 million bpd produced in other former Soviet Union countries, notably Kazakhstan, is exported via Russia. US imported 200,000 bpd of crude from Russia last year, and the UK less than half of that.
Tonhaugen said that even prior to the announcement, US buyers had already started to shun barrels from the Russian region immediately since the outbreak of the conflict, owing to swift implementation of financial sanctions, and restricted commodity financing from lenders. “The market has reacted as if a Western embargo was in place, at least partly, resulting in a similar cutback in flows as an outright embargo would.”
With the Ukraine-Russia crisis showing no signs of waning, brokerages and consultancies expect prices to exceed $180 a barrel. Analysts do not expect oil producing countries to be able to pump out over 4 million bpd of crude oil into the market immediately.
“Oil prices could hit $240 per barrel this summer in the worst-case scenario if Western countries roll out sanctions on Russia’s oil exports en masse,” said Tonhaugen. “Market volatility is at an all-time high, with prices surging on the expectation that supply will further tighten due to restrictive sanctions on Russian energy from the West.”
The OPEC+, which includes Russia, holds about 4 million bpd in spare crude capacity, but there are few signs that the Middle East producers are opening the taps. The group held a conference last week and agreed to raise their production limit by 400,000 bpd, sticking to a schedule they set last year. The decision, which was widely expected, and had little impact on oil prices.
“All we can do is to stay the course of our decisions,” Mohammed Barkindo, OPEC’s Secretary General, was quoted as saying at an industry event this week. He also added that despite a massive spike in prices, there was no physical shortage of oil in the market.
Another potential source of crude could be Iran, which is currently in the middle of negotiating a nuclear agreement with Western powers. Iran, which is currently producing 2.5 million bpd of oil, can ramp up its output to 4 million bpd within three months of the sanctions being lifted, regional media has reported, citing Iranian officials.
But the talks have been complicated by a last-minute demand from Russia for guarantees from the US that sanctions targeting Moscow over its attack on Ukraine would not affect its business with Iran. Analysts have said that even after the Iranian sanctions are lifted, the country will take some time to secure buyers and also set up a system to clear payments.
Boost for GCC
The higher oil prices are expected to boost GCC budgets.
“We now expect the UAE, Saudi Arabia, Qatar and possibly Oman to run budget surpluses this year,” said Khatija Haque, chief economist and head of research at Emirates NBD.
“However, we think most of this additional revenue will be invested through sovereign wealth funds or used to build up reserves, rather than translate to an increase in general government spending,” said Haque.
“Increased oil production will also result in much higher headline GDP growth this year and probably into 2023 as well, relative to what we had expected at the start of this year,” she added.
In the past, US shale producers have responded swiftly to short oil price spikes and boosted their production levels. A shale resurgence centered around an oil-rich basin in West Texas - called the ‘Permian Basin’ – made US the world’s largest oil producer for the first time in 2018.
However, shale firms have significantly scaled back their activity under increasing pressure to boost shareholder returns. During a recent event, a US energy official urged producers to do “whatever it takes” to increase supply and bring oil prices under control.
As per some media reports, the US is considering lifting sanctions on Venezuela to ease the current supply crisis. The South American country has one of the world’s largest oil reserves, but years of mismanagement and corruption have resulted in its output dropping to around 800,000 bpd from a peak of 3.2 million bpd in the 1990s.
Meanwhile, oil-consuming countries have tried to use their strategic reserves to take some of the heat out of the market.
IEA member countries unanimously agreed on March 1 to an initial emergency response plan to alleviate the increasing tightness in oil markets resulting from Russia’s attack on Ukraine. The countries also agreed to make 60 million barrels of their emergency oil stocks available to the market.
“The decision taken to release emergency stocks – for only the 4th time in the IEA’s history – has sent a strong message that IEA members will do all they can to provide stability to the market during these difficult days,” said IEA executive eirector Fatih Birol. “We continue to monitor the situation closely. If necessary, we are ready to recommend additional steps to build on this initial release.”
The announcement to ban Russian oil imports had a limited impact on global markets. Major stock indexes only ended slightly lower on Tuesday as the move was widely expected. Investors have also felt encouraged by reports that Ukraine is no longer demanding NATO membership, in what is seen as an olive branch to Russia.
Jeffrey Halley, a senior market analyst at OANDA, said the current rally in oil prices has been driven by “panic” as the world faces a stagflationary wave and a potential recession. “It is clear that the market still sees serious upside risks to oil prices as the world scrambles to replace Russian energy in an already very tight market.”
India, which meets about 85 per cent of its oil requirement through imports, will be among the biggest losers in the current crisis. The country’s crude oil import bill is set to exceed $100 billion in the current financial year, almost double the spending of last year.
Fuel prices could see a Rs15-Rs28 hike in India soon, according to industry sources, and will pile on further pressure on the economy as it recovers from a two-year pandemic.