Expected: Continued high level of oil prices

The price of oil has been very volatile in the last week In the weekly summary, the price of oil fell compared to the high level it reached due to the fear of market shortages due to the sanctions imposed on Russia in response to its invasion of Ukraine | The price of BRENT oil decreased from about 123.5 to about $ 116.6 per barrel at the end of the trading day on March 11, 2022, and the price of a WTI barrel decreased from about $ 117.2 to about $ 111.1.

Dr. Gil Befman 14.03.2022

Global supply:

• Market volatility is mainly due to concerns about future oil supplies. This is due to Russia’s invasion of Ukraine and a significant increase in concerns about a situation where Russian oil will not be supplied to its buyers as well as an increase in concerns about the ability to deliver future orders.
• These concerns mean that Russian oil customers are looking for alternative sources of supply and Russia is having a hard time selling the oil it has also produced to its customers in Asia, even though it offers it at a price significantly lower than the market price and even though no global sanctions have been imposed on energy purchases from Russia.
• The OPEC Secretary-General argues that the shortage in the SPOT market is not significant and that there is no concern about the supply of oil barrels in the short term, indicating that the main concerns are reflected in the futures market and they relate to the future supply of oil.
• Despite this position by OPEC, the United Arab Emirates has announced that it will ask the OPEC + Group to increase the rate of relief in production quotas which currently stands at 400,000 barrels per day, but stressed its commitment to the group’s decisions. The next time.
• The United States is tightening economic pressure on Russia following its invasion of Ukraine, and President Biden has banned the import of fuels and oil from Russia to the United States in order not to indirectly fund Russia’s war in Ukraine. This ban is expected to contribute in the short term to rising US fuel prices.
• The OPEC Group has argued that it has no option to increase oil production in order to meet the expected excess demand to be in the market with the imposition of a ban on Russian oil imports to the US.
• The US oil inventory decreased in the week ending 3/4/2022 by about 1.9 million barrels, and it reached about 41.6 million barrels.

Global demand side:

• Demand for car fuel in the United States rose in the week ending March 4 to about 9.0 million barrels a day. This increase in demand occurred against the background of fears of a further rise in oil prices which will further increase the price of fuel to the consumer and as a result the advance of purchases by consumers.
• The rise in the price of oil has led to a significant rise in fuel and gasoline prices in the United States and Europe. Despite sanctions imposed on Russian oil and a ban on oil imports to the US, Europe is expected to continue consuming oil distillates, with an emphasis on diesel, from Russia due to the continent’s large energy shortages and the large premium energy traders demand for Europe’s diesel supplies.
• On the other hand, the demand for jet fuel dropped to about 1.5 million barrels a day. This decrease was mainly due to the relatively rapid transfer of the rise in the price of oil to flight prices and it offset the positive effect on demand due to the decrease in morbidity.
• China’s oil imports declined earlier this year due to seasonality due to Chinese New Year during which some factories cease operations for an extended period due to workers ’leave. In January-February, China imported about 10.6 million barrels of oil per day, a level about 3% lower than December 2021.

Natural gas economy:

• The price of natural gas in the US (Henry Hub) has dropped slightly in the last week, but remains at a high level of about $ 4.6 per MMBTU. This is against the background of declining oil prices due to expectations of energy supply from Iran and Venezuela and despite the geopolitical tensions in Eastern Europe that intensify the uncertainty in the energy market and disruptions in the supply of natural gas from Russia to Europe.
• The drop in the price of gas in the US was also supported by a significant drop in the price of gas in Europe (TTF) which fell sharply last week from about 227 to about 132 euros per MWh.
• However, prices remained relatively high, due to Europe’s much dependence on Russian energy, with an emphasis on Russian natural gas.
• As part of the sanctions, Germany has suspended the procedure for approving the operation of the Russian gas pipeline Nord Stream 2. Without these bureaucratic approvals, Russia will not be able to operate the gas pipeline intended for gas transmission underwater directly from Russia to Germany.

Expect medium term:

• The price of oil is expected to be affected by the following factors: continued geopolitical tensions over the fighting; The degree of progress towards a nuclear agreement between the superpowers and Iran; Possible easing of sanctions imposed by the US administration on Venezuela; OPEC + production quota relief policy.
• The OPEC + group will increase oil production in April, in line with the decision made at its last meeting. Actual output, however, is expected to increase less than the increase in production quotas (400,000 barrels per day), as some group members have exhausted most of their excess production capacity, for now.
• 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.
• The high price level, together with the sanctions imposed on Russia, which reduce its demand for oil, increase the economic viability of the major oil producers that are members of OPEC to deviate from production quotas and increase oil production.
• If the sanctions on Russia remain in place for a long time, it seems that this will have a lasting effect on oil demand, even though the sanctions will only partially include Russia’s energy production sector.
• As long as Russia is freed from OPEC + restrictions, and if sanctions do not widely include its energy sector, Russia will be free to increase its output further, subject to the energy transport capabilities and the willingness of world countries to purchase oil from it.
• The Russian invasion of Ukraine continues to support a high level of oil prices in the immediate term, and even a further increase, however to the extent that heavy fighting is limited in time, with no direct leakage to neighboring countries, this increase is expected to be temporary.

The writer is the chief economist of Bank Leumi