| Dr. Gil Befman, Chief Economist of Bank Leumi and Benyahu Bolotin, Economist, Leumi
| Development of the price of oil
The price of oil has risen in the past week amid fears that Germany will restrict Russian oil imports and alongside the apparent easing of closures in China that is expected to lead to rising demand.
In a weekly summary, the price of type oil rose to about $ 114.23 per barrel and the price of type oil rose to about $ 113.78 per barrel.
| Global supply
Saudi Arabia has hinted that easing production quotas will continue at the current rate and that no significant increase beyond that is expected, despite high energy prices.
According to her, the high energy prices “for end users” are due to almost full utilization of the production capacity of refineries in the world and not to a shortage of crude oil supply itself and thus “rolled over” the problem to other factors.
The strength of this claim seems to have weakened recently, with the ratio between the price of diesel and the price of crude oil (in the US) falling from the peak level of early May, the drop in the price of diesel in the US from the beginning of the month, while crude oil continued to rise.
According to market estimates, Russian oil exports to Asia, with an emphasis on India and China, began to recover during the first half of May, which partially offsets the decline in energy sales to Europe.
Russia estimates that its oil production will continue to grow in June, after growing in the first half of May by about 200,000-300,000 barrels per day.
This increase is expected to be supported by the later expected easing of the social distance restrictions imposed in China, which will increase energy demand for industry and transportation.
The G7 finance ministers have continued discussions on tightening sanctions on Russia, while trying to restrict Russian oil imports and reduce the impact this move will have on energy prices.
The US has already imposed a ban on Russian oil imports and the EU is expected to impose a similar ban gradually. Hungary is the main opponent in the EU of imposing an embargo on Russian oil as its economy depends on it substantially and imposing a ban on imports will hurt it.
It is estimated that the cost of switching from using Russian oil to using oil from another source is about $ 880 million. This is due to the need to adjust the refineries and transmission infrastructure.
This opposition raises difficulties for the EU to pass the decision banning oil imports by all EU members, but it seems that by the end of the year, Germany will stop importing Russian oil even if the EU fails to reach agreements on the issue.
As part of its efforts to find alternatives to Russian oil, the US administration is examining the possibility of easing sanctions on the oil sector in order to increase oil supplies to Europe.
The U.S. Secretary of Energy argued that the U.S. has no plans to import oil to Venezuela and that the administration is interested in increasing U.S. oil production.
The easing of existing sanctions on Venezuela’s energy sector will help increase oil supplies to Europe, not the US, which will indirectly alleviate the shortage of supply in the US market due to the appointment that may be in excess of global demand.
The growing pressure in the U.S., backed by high energy prices, has led the U.S. administration to promise to plan for new licenses to lease oil and gas fields at sea in the Gulf of Mexico.
This is in contrast to the position of the administration, which acted vigorously at the beginning of its path to reduce the granting of new lease licenses for environmental reasons.
However, this planning is only preliminary and is not expected to affect market demand in the coming months and does not even guarantee actual leasing, of some of the fields, at the end of the process.
US crude fell in the week ending 5/13/2022. This decline was due to net import intakes, as a result of more exports than imports, and alongside an increase in refinery utilization rate of 91.8%.
The weekly report estimates that crude oil inventories fell by 3.4 million barrels per week, to about 420.8 million barrels in total. .
Price pressures weigh on U.S. oil production costs, largely due to rising steel prices that could slow U.S. oil drilling expansion.
The break-even price of oil producers using oil shales in the Permian Basin is expected to rise from about $ 30-35 to about $ 40-45 per barrel.
However, at current price levels, oil production is worthwhile for existing drilling, but the increase in costs may adversely affect the pace of new investment in the market due to fears of a future drop in oil prices to a price level that oil shale production will not be economical.
The price gap between BRENT and WTI oil has narrowed significantly in recent weeks, due to high US demand.
This is even before the summer driving season in the US begins. If demand in the summer continues to strengthen, there is a chance that the price of WTI will temporarily rise to more than the price of BRENT.
| Global demand
Demand for fuel remained strong, despite rising prices, and in the week ending 5/16/2022 they rose to more than 9 million barrels per day. In our estimation, fuel prices are expected to remain high in the near term, due to the expectation of stronger demand in the summer months.
These high prices increase the profitability of fuel refining than diesel refining and in our estimation the refineries are likely to change priorities and increase their fuel output in order to maximize their profits in the summer season, when fuel demand is higher than in the rest of the year.
This situation could exacerbate the current shortage of diesel in the coming months.
Demand for jet fuel has also risen, reaching more than 1.6 million barrels per day. This is against the background of the increase in demand for flights during the summer season.
This increase in demand led to an increase in jet fuel production that reached 1.78 million barrels per day, the highest level since the outbreak of the Corona crisis in February 2020.
Demand for fuel is also growing in the UK and Asian countries. The easing of restrictions in some parts of China has led to an increase in road travel and as a result the demand for fuels has increased.
Tight restrictions also reduced China’s fuel exports in April, but demand is likely to grow in the coming months, which will also support high fuel prices.
At the same time, China wants to replenish its oil reserves, while purchasing oil from Russia at a price lower than the market price, which may increase Russia’s oil sales.
However, the recovery in demand in China is fragile, due to the “zero corona” policy that the administration is pursuing, so a resurgence of morbidity in major cities could once again lead to a tightening of restrictions and a reduction in demand for oil.
In addition, India’s demand for fuels also rose in early May, mainly due to rising demand for fuel used for land transport.
| The natural gas economy
The U.S. price fell last week, in our estimation and after a sharp rise the week before, and reached $ 7.74 per MMBTU.
This decline is a slight correction to the sharp rise in prices in the first week of May, but US natural gas prices have remained very high due to the global shortage of natural gas, with an emphasis on the European market.
This is because the shortage in Europe has led to an increase in external demand for liquefied natural gas (LNG), which reduces the supply for the domestic market.
The decline in prices was supported by the continued increase in natural gas inventories in European reservoirs, and the gap between the current level and the level in the corresponding period last year narrowed slightly in the last week and stands at about 19%.
European gas reserves are expected to continue to fill up over the next six months, but they have a long way to go before they return to the level they were in the same period last year or to the average level in that period in the last five years.
In our estimation, current prices are high and may remain in this environment in the short term, but not in the medium term.
This is especially so in light of the expectation of an increase in inventories in natural gas reserves, alongside the expectation that European countries will find additional alternatives to natural gas in general and Russian gas in particular, which will slightly ease the excess demand in the US market in the longer term.
The price of natural gas in Europe (TTF) has fallen in the last week and has remained in the environment in which it has been since the beginning of May.
This decline occurred despite Russia announcing that it would stop supplying natural gas to Finland, a supply cut that went into effect last weekend, indicating that the market estimates that the EU will be able to find alternative gas sources and in any case it will not stop buying gas from Russia before finding Other alternatives.
This assessment was strengthened after Germany and Italy confirmed that they would adjust the method of payment for Russian natural gas in accordance with Russia’s demand that payment be made in rubles, despite EU opposition initially with Russia’s demands.
The payment will be made in such a way that technically they do not violate EU sanctions, but in practice it meets Russia’s requirements.
Continuing with the above, Europe is in contact with a large number of countries that may supply it with natural gas, which will lead to a diversification of its energy sources and a reduction in dependence on Russian natural gas. These efforts led, among other things, to the opening of discussions between the European Union and Israel on the supply of natural gas.
It should be noted that there are plans to build a pipeline to supply natural gas from Israel to Europe, which is expected to be built in 2025, but a faster solution is needed in the short term.
These efforts may lead to Israel supplying liquefied natural gas to Europe through cooperation with Egypt, since Israel does not have a facility for liquefying natural gas while in Egypt there is such a facility and there is a transmission of gas from Israel to Egypt.
There are risks regarding the degree of ability to realize the cooperation with Egypt, in view of the food crisis that is taking place there, which could agitate the population and lead to the disruption of such a venture.
| Expect medium-term
The price of oil is expected to be affected by the following factors: economic measures against Russia; Possible easing of sanctions on Venezuela; The degree of progress of the negotiations with Iran; the degree of application of the relief in the production quotas of {{+ ecl-230 || OPEC +}}.
In the very short term, the supply of oil to the market from the strategic reservoirs may affect and slightly reduce the excess demand in the market, but it is not expected to meet all the excess demand.
In contrast to the futures contracts that indicate a decline in the price of oil later this year, the price of oil is not expected to fall significantly in the near future.
We estimate that this decline will only occur in the longer term, mainly depending on the extent of the expansion of global supply and the completion of the transition of major countries from Russian sources to more diverse alternative sources.
Maintaining energy prices at their high level is expected to hamper the growth of global activity, with the main victims being countries whose economies are industry-oriented and have no independent energy sources.
PDF document: Leumi’s full weekly energy review
The writer is the chief economist of Bank Leumi. The data, information, opinions and forecasts in the review are provided as a service to readers, and do not necessarily reflect the official position of the Bank. They should not be construed as a recommendation or substitute for the reader’s independent discretion, or an offer or invitation to receive offers, or advice to purchase and / or make any investments and / or actions or transactions. Errors may occur in the information and changes may occur. The Bank and / or its subsidiaries and / or companies related to it and / or the controlling shareholders and / or stakeholders in which of them may from time to time have an interest in the information presented in the review, including financial assets presented in it.