The world that needs a cheaper oil price to continue its recovery from the corona, but the OPEC + group is unable to supply the supply, Japan is selling from the reservoirs, Iran is benefiting from easing sanctions
Development of the price of oil
The price of oil fell slightly last week: the price of BRENT oil fell to about $ 95.88 per barrel at the end of the trading day on 18/2/2022 and the price of a WTI barrel fell to about $ 91.92. This decline came amid reports over the past week of a certain withdrawal of Russian forces from the border with Ukraine, which has slightly reduced market concerns.
Global supply
Further to the above, changes in the level of geopolitical tensions between Russia and Ukraine have a strong impact on volatility in the oil market, with estimates of escalation leading to large price increases while reports of a possibility of calming, albeit temporary, leading to a drop in oil prices. This tension is expected to have a decisive impact on energy prices in the near term. So if escalation occurs, especially if Russia invades Ukraine even if partially, Western countries are likely to impose economic sanctions on it that will hurt global oil supplies, with an emphasis on Russia’s energy supplies to Europe. However, if the conflict is resolved through diplomatic channels, a drop in the price of oil is expected. At the same time, these geopolitical tensions are also leading to volatility in the derivatives market, while strengthening the bullish positions. This is reflected in an increase in the number of call options that reached the highest level since 2019.
The OPEC Group continues its policy of increasing production quotas, as part of the OPEC + Group, in order to meet market demand. However, some of its members find it difficult to increase oil production, due to the low capital investments that have led to a non-increase in their oil production capacity. The IEA chairman said the OPEC + group should increase its oil output in order to reduce oil price volatility and prevent it from crossing the $ 100 barrel threshold.
Japan has started supplying 1.6 million barrels of oil from its strategic reservoirs, following the US supplying oil from the strategic reservoirs, as part of cooperation between a number of countries that have pledged to supply oil from the strategic reservoirs to prevent further price increases.
The progress of the nuclear talks between Iran and the superpowers could lead to an agreement, which may be temporary, between the parties, under which the economic sanctions imposed on Iran’s energy sector will be lifted. Iran has begun talks with South Korean refineries, who may be potential customers, about a possible supply of oil should sanctions be lifted. Refineries in Europe are also expected to purchase some of the Iranian oil, which will alleviate the energy shortage in Europe. The removal of sanctions on Iran, if any, could add about 2 to 2.5 million barrels of oil a day to the global market, easing price pressures. In the future, it is possible to increase Iran’s oil production capacity by more than one million barrels. However, we estimate that OPEC + will include Iran in production quotas, with quotas likely to be imposed on it gradually, leading to a more moderate increase in its oil output. The talks seem to be close to the closing stage, but there are other gaps that make it difficult for the parties to reach an agreement.
US oil inventories rose in the week ending 11/2/2022 by about 1.1 million barrels and reached about 41.5 million barrels. However, even after this increase, the level of inventories has remained about 10% lower than the average level during this period in the last five years. This increase was against the background of an increase in net oil imports, which was due to a decrease in exports rather than a decrease in gross imports, along with a decrease in the utilization rate of the refineries, which reached 85.3%. In doing so, it is again approaching the level of less than 20 million barrels, which is estimated as a threshold below which there is an operational risk to the oil reservoir.
Oil production in the Permian Basin continues to rise, amid rising oil prices. Oil production in the Permian Basin, an area that also includes the Gulf of Mexico, crossed the 5 million barrels per day threshold in January, reaching 5.06 million barrels per day. The EIA estimates that output is expected to continue to rise in the first quarter of 2022. The increase in output in the Permian Basin is expected to help increase U.S. oil output, which is expected to continue to grow gradually this year and in 2023. When private oil producers can increase their output at a faster rate than large and public producers, depending on the degree of ability to raise large resources in the markets. As a result, the increase in US oil production may have a moderate effect on the global oil market; Most of the impact on the global supply side is expected to be from Saudi Arabia and the United Arab Emirates, members of OPEC, which have not yet exhausted their full oil production capacity.
Global demand
Demand for US car fuel has continued to fluctuate in recent weeks and has fallen in the week ending February 11 from about 9.1 to about 8.6 million barrels per day. The highest in the last seven years, despite attempts by the US administration to reduce energy prices to the consumer. U.S. fuel prices continued to rise to the highest level since July 2014. In some states, prices rose particularly sharply, such as in California where the price of a gallon of fuel rose last week to about $ 4.74, compared to a national average of about $ 3.53 per gallon.
On the other hand, the demand for jet fuel rose slightly to about 1.5 million barrels per day, against the background of the decline in morbidity. These demands have stabilized within the range of 1.3-1.8 million barrels per day, where they are from the second half of 2021, but are lower than the level that was before the spread of the corona virus. The decline in morbidity is expected to support, later this year, a further increase in demand for flights with an emphasis on the spring and summer tourist season.
The natural gas economy
The price of natural gas in the US (Henry Hub) continues to fluctuate and has risen in the last week from 4.00 to $ 4.49 per MMBTU. Last year and at 11.6% from the average level in this period in the last five years.
On the other hand, the price of gas in Europe (TTF) has decreased slightly in the last week and reached about 73.5 euros per MWh (about 24 dollars per MMBTU). The price of natural gas in Europe may fall slightly, due to the mild winter that led to the contraction of inventories less than expected. At the same time, Europe is increasing the supply of liquefied natural gas (LNG) from the US and Asian countries. The supply of liquefied natural gas is expected to remain high this year, but will decrease in the coming months due to Asian countries’ need for liquefied natural gas. The LNG at the time of shutting down some of the nuclear reactors that provide electricity for the benefit of routine maintenance treatments.
Uncertainty regarding the supply of Russian natural gas to Europe could worsen if Russia invades Ukraine, which will lead to economic sanctions on Russia which will exacerbate the shortage of natural gas in Europe which is dependent on Russian oil. However, if tensions are resolved through diplomatic channels, Russia will return its natural gas supply to Europe and the price of European natural gas is expected to fall. This reduction will also be supported later, if the regulators approve the operation of the Russian Nord Stream 2 gas pipeline and if the US does not impose sanctions on the operation of this gas pipeline between Russia and Germany. And in particular German, in Russian natural gas which will also increase its political power in the region.
Expect medium-term
The price of oil is expected to be affected by the following factors: the geopolitical tension between Russia and Ukraine; The nuclear agreement between the superpowers and Iran; OPEC + production quota relief policy. If a nuclear agreement is signed with Iran, Iran is expected to increase global oil production by 2-2.5 million barrels per day, which could lead to a drop in oil prices and a halt in the easing trend in OPEC + production quotas, and even the inclusion of Iran, a member of OPEC, in the production quotas agreement. Of OPEC + gradually.
If the agreement with Iran is not signed in the next two weeks, the OPEC + group is expected to increase oil production in March, in accordance with a decision made at its last meeting, and there may also be further easing of production quotas in April which will increase oil production by an additional 400,000 barrels per day. Actual output, however, is expected to increase less than the increase in production quotas, as some members of the group have exhausted most of their excess production capacity, for the time being. The major oil producers in the OPEC Group are expected to be the main beneficiaries of the increase in production quotas, as they have not yet exhausted their production capacity, and on the other hand it seems that the African companies in the group will have difficulty increasing their oil production capacity. It seems that the rise in morbidity in the current wave has not significantly hurt energy demand, and the continued recovery in economic activity supports OPEC +’s policy of easing production quotas.
As mentioned at the outset, the recent rise in oil prices is mainly due to tensions between Russia and Ukraine. Russia’s invasion of Ukraine could lead to Western sanctions on Russia, which could further raise the price of oil in the short term, depending on the intensity of the geopolitical escalation. On the other hand, resolving the conflict diplomatically, if at all possible in the short term, and surprising the removal of the threat over Ukraine, can lead to a halt in the rise in the price of oil. Oil futures indicate a certain drop in price, in the first half of 2022 and a further drop during 2023. This is probably due to expectations that oil supply will increase in 2022, and there may even be some supply oversight, alongside monetary policy tightening in many countries.
By the Chief Economist of Bank Leumi, Dr. Gil Michael Befman.