Fears over oil supply shortages are adding to price volatility

Renewed fears of global supply shortages are driving oil prices higher, the latest sharp moves in three weeks of exceptional market volatility since Vladimir Putin ordered Russian tanks into Ukraine.

International oil benchmark Brent crude settled at $107.93 a barrel on Friday, up more than 9 percent in the previous two sessions. The price was well below a high of $139 reached on 7th Marchbut still about $10 a barrel more than before Russian invasion.

Calculating the supply effect of punitive sanctions on Russia, the world’s largest exporter of crude oil and petroleum products, has been complicated by hopes of peace talks between Moscow and Kyiv and the possibility of easing restrictions on oil exporters Venezuela and Iran. lockdowns Containing a new wave of Covid-19 in China, the world’s largest oil importer, will reduce some consumption.

“Oil price volatility goes hand-in-hand with wars involving big oil producers,” said Bill Farren-Price, a director at Enverus, an energy consulting firm.

“Supply risk is one thing, but doubts about demand pull in the other direction. The next big signposts will be Europe’s approach to Russian energy sanctions and Iran’s nuclear talks, which could trigger a flood of Iranian oil. It’s a huge oily price seesaw.”

Oil prices soared after the International Energy Agency said on Thursday that Russia’s crude oil production could fall by as much as 3 million barrels a day, or 3 percent of world total, from April. The agency, a watchdog for western nations, warned the world of the “biggest”. [oil] supply crisis for decades”.

But gains will be limited until traders can quantify the extent of Russia’s supply losses, other analysts said.

Russia’s oil production actually rose that much in March, said Florian Thaler, chief executive of OilX, which tracks global oil flows. Sales of refined products started falling, but crude oil exports remained resilient, he said.

EU countries and others, including China, continue to buy Russian oil despite the US ban. Thaler said Indiawhich normally imports about 150,000 b/d of Russian crude could push that figure to over 500,000 b/d in April.

Russian crude oil exports are now being sold at prices well below Brent to attract buyers, Morgan Stanley analysts said, “and history suggests that crude oil, when sufficiently discounted, tends to find a market.”

Any loss of Russian production would strain a fragile market where global oil supplies have already failed to keep up with surging demand in the wake of the pandemic, analysts said.

On Thursday, Morgan Stanley raised its Brent price forecast for the third quarter by $20 a barrel to $120 a barrel. Goldman Sachs has raised its forecast for the year to $135 a barrel but said Brent could reach as high as $175.

Commercial oil stocks in rich countries have been falling rapidly as supply lags behind demand, the IEA said this week. Western countries also have released oil from emergency reserves to cool oil prices, which are more than double their long-term historical average.

Some analysts have said that a price jump caused by a looming supply shock could destroy oil demand and eventually drive prices lower.

According to the IEA, the Ukraine crisis alone could “noticeably dampen global economic growth”. She cut her forecast of how much more crude oil the world would consume in 2022 by about a third.

OilX’s Thaler pointed to China, where he said imports and refinery demand were trending much lower now than they were in 2021.

In contrast, consumption in the US, the world’s largest oil market, has remained near historic highs of over 20 million b/d in recent weeks despite record gasoline prices.

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Adam Bradshaw

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