The price of oil is not expected to fall any time soon

Leumi: “The price of oil is not expected to fall significantly in the near future, in contrast to the embodiments in futures contracts that indicate an expectation of a drop in the price of oil later this year.”

Dr. Gil Befman 06.04.2022

Dr. Gil Befman | Photo: Oren Dei

Development of the price of oil – In a weekly summary, tomorrow BRENT oil dropped to about $ 106 a barrel and the price of WTI oil dropped to about $ 100 a barrel. However, the fighting in Ukraine is still weighing on the aggregate supply in the market and is expected to continue to affect the oil market in the near term.

Global supply:

• The OPEC + group decided on further relief in the production quotas of the group members and increased the quotas by 432,000 barrels per day. In our estimation, the increase in the Group’s oil production will be lower than the target, due to the expected decline in the oil production of Russia, which is a major oil producer.
• The United Arab Emirates has announced that the group’s cooperation with Russia will continue, despite the countries’ opposition to the Russian invasion of Ukraine.
• Saudi Arabia, which is the largest oil producer in the OPEC + group, opposes increasing its oil production in order to fill the shortage of supply created as a result of the decline in Russian production against the background of the sanctions imposed on it.
• Russia is trying to cope with the decline in its energy sales to Western countries, by increasing supplies to Asian countries, particularly China and India, which purchase oil at a significant discount. Poland, on the other hand, plans to reduce its dependence on Russian oil and will try to stop importing oil from Russia by the end of 2022.
• Canada has decided to increase its oil and natural gas exports, in order to help countries trying to avoid buying Russian energy
• The U.S. government plans to supply one million barrels of oil a day for six months, with the goal of easing market price pressures. The UK is also expected to supply oil to the market from its strategic reservoirs as part of an effort to reduce price pressures and help reduce dependence on Russian energy.
• The EIA’s weekly report estimates that crude oil inventories fell by 3.4 million barrels per week, to 409.9 million barrels in total, the lowest level since the end of September 2018.
• The Biden administration calls on US oil companies to increase production. This is in contrast to the policy at the beginning of his tenure, which included tightening the activities of the energy sector for environmental reasons.

Global demand side:

• High fuel prices weigh on demand, which has dropped to about 8.5 million barrels a day.
• U.S. diesel exports have risen recently, due to rising demand from customers in Europe and Latin America to purchase energy from a substitute source for Russia.
• On the other hand, demand in China is expected to decline, due to rising morbidity in China, which has led to tighter restrictions in the country.
• Germany plans to gradually reduce fuel purchases from Russia, and almost completely stop imports by mid-2024. However, it noted that Europe can not impose an immediate embargo on the Russian energy sector, as such a move would hurt the European economy.

Natural gas economy:

• The price of U.S. natural gas has continued to rise over the past week and has reached $ 5.64 per MMBTU. This is as a result of the agreement signed between the United States and the European Union to increase the supply of liquefied natural gas (LNG) to European countries by the end of 2022, with the aim of further reducing natural gas imports from Russia to the European Union.
• The price of natural gas in Europe (TTF) has risen in the past week, following an abnormal volatility in its price in the second half of the first quarter of the year. This price increase occurs after Russia announced that the payment for the sale of natural gas to “non-friendly” countries from the beginning of April will be only through Russian rubles and not through US dollars or euros.
• If Germany and Russia do not reach an understanding on how to pay and also do not find sufficient alternatives for the supply of natural gas, the price of natural gas in Europe may rise significantly again.

Expect medium term:

• The price of oil is expected to be affected by the following factors: the geopolitical tension around the fighting; The extent of progress towards a nuclear agreement with Iran; Possible easing of sanctions on Venezuela; Accelerating the easing of OPEC + production quotas, with an emphasis on countries with overcapacity.
• For now, the uncertainty regarding the nuclear agreement with Iran is great and even the chances have increased that the agreement will not be signed in the near future. This is due to Iran’s recent demands from the United States. As a result, market demand surpluses are expected to remain in the coming months.
• The IEA believes that most of the effort should be invested today in reducing world oil consumption. Meanwhile, contrary to this recommendation, various countries are currently working to preserve the volume of consumption of oil and its products by reducing the tax rates on energy and thus working to preserve the level of demand and not the other way around – reducing the demand for oil.
• The price of oil is not expected to fall significantly in the near future, in contrast to the embodiments in futures contracts that indicate an expectation of a drop in the price of oil later this year. We estimate that this decline will not occur soon, but only in the longer term, mainly depending on the degree of expansion of global supply and the completion of the transition from Russian sources to alternative sources.

The writer is the chief economist of Bank Leumi