| Dr. Gil Befman, Chief Economist of Bank Leumi and Benyahu Bolotin, Economist, Leumi
| Development of the price of oil
The price of oil has continued to rise over the past two weeks. The price of type oil rose to about $ 105.32 per barrel and the price of type oil rose to about $ 103.52 per barrel.
This is due to the impact of the war in Ukraine on the supply of oil to the market which caused the acute energy crisis in Europe and along with a decrease in Libya’s oil production as a result of civil unrest in the country, and despite the high morbidity in China.
| Global supply
The high oil price is supported by the avoidance of large and significant relief in the production quotas of the OPEC + group, which supports the excess demand over the existing supply in the market, which even expanded from the beginning of the war in Ukraine which led to declining Russia’s oil production.
It is likely that the group will continue gradually in production quotas and actual output will even decrease at a significantly slower rate than the official quotas easing, which supports the high levels of oil prices. At the same time, the escalation of conflicts in Libya has led to civil unrest disrupting oil production and export activities from the country.
As a result, its oil output has shrunk by more than half a million barrels a day. In our estimation, if the unity government in Libya succeeds in restoring calm to the country and oil production returns to normal, Libya is also expected to increase oil production in the medium term to 1.4 million barrels per day, in line with government plans.
Russia’s decline in oil production accelerated in the first half of April. During the first 19 days of April, Russia produced about 10.11 million barrels per day, a decrease of about 8.2% from the average output in March where its average oil output was about 11.01 million barrels per day.
Russia claims to be able to sell the oil it produces, but a number of refineries around the world are refusing to buy Russian energy. As part of its efforts to secure the sale of the energy produced, Russia is trying to offer tenders for the purchase of large quantities of oil, when it sells them at a significant discount from the market price.
The shortage of oil is due in part to the ban by some countries on purchasing oil from Russia, even though energy purchases were not included in the sanctions imposed on it by the US, along with the refusal of some refineries to purchase Russian energy.
Most of the shortage is felt in Europe, which led the US to start sending oil from its strategic reservoir to Europe. Exports of oil supplied from the US strategic reservoirs are rare and hint at the intensity of the energy crisis in Europe and the expansion of oil supply to Russia. Until the beginning of the war in Ukraine.
These U.S. efforts to supply energy to other countries in energy crisis, due to their refusal to purchase oil from Russia, led to a significant increase in U.S. oil and distillate exports in the week ending April 15th.
Alongside this, Japan has announced that it will join efforts to supply oil to the market and it will also sell oil from its strategic reservoirs.
U.S. trade declined in the week ending April 15, 2022, amid declining net imports alongside an increase in refinery utilization rate. The EIA’s weekly report estimates that crude oil inventories fell by 8.0 million barrels per week, to approx. 413.7 million barrels in total, a level about 15% lower than the average level in this period in the last five years.
| Global demand
High fuel prices continue to weigh on the growth in demand, which has been in the US for the past two months around the level of 8.5-9 million barrels per day. With the start of the summer season, demand is expected to rise slightly more. More on demand growth.
Fuel and diesel, which are used for land transportation, have the greatest impact on the end consumer.
Fuel supplies from Europe to the U.S. typically increase in April, ahead of the summer months when U.S. fuel demand is rising. However, the energy crisis in Europe is hampering its fuel exports, which fell in the first ten days of April to a level 23% lower than in the same period last year, which could exacerbate US fuel shortages which brought the average fuel price to more than $ 4 per gallon. .
At the same time, demand for jet fuel has been in the range of 1.3-1.7 million barrels per day for the past ten months, but they have remained below the pre-Corona virus demand levels.
With the opening of the tourist season, demand may grow, but at a moderate pace. This is due to the increase in the price of jet fuel, which could lead to a rise in flight ticket prices and slow down the growth in demand for flights.
Rising energy prices have led to declining demand for fuel and diesel in India, the third largest oil consumer in the world. The fuel and diesel sales of India’s three largest retailers fell in the first half of April by 16% and 10%, respectively, compared to the first half of March.
In order to cope with the high energy prices, India is increasing its oil purchases from Russia, despite opposition from the US administration, in order to try to purchase energy at a price lower than the market price.
These acquisitions point to India’s fear of a slowdown in economic activity due to the high oil prices that are inflating production costs in the industry.
At the same time, high oil prices are eroding the profits of Asian refineries and have also led to a decrease in the amount of refined oil in refineries in China. Also, tightening restrictions in China is hurting domestic demand for fuel and diesel, which supported an increase in oil distillate exports in March.
In our estimation, the demand for fuel and diesel in China is expected to increase in the summer months, with the decline in morbidity in the country, which will add to the pressure of existing demand in the market. If supply does not increase significantly, this will support high oil prices in the coming months.
| The natural gas economy
U.S. prices continued to rise last week and reached $ 6.96 per MMBTU. This increase is due to the signing of additional natural gas supply contracts to other countries, with an emphasis on Europe which has increased liquefied natural gas (LNG) imports from the US since That imports from Russia have decreased.
This demand from Europe is expected to continue at least until the end of 2022, supporting the high natural gas prices which may even temporarily rise beyond $ 7 per MMBTU. At the same time, natural gas reserves in the United States have begun to fill up, but are at a low level of about 16.8% below the average in this period in the last five years, so prices are expected to remain high in the near future.
The reservoir replenishment season is expected to continue until September-October. If the reservoirs are sufficiently full and reach a higher than average level in the last five years, this will support the decline in natural gas prices in the medium term.
On the other hand, the price of natural gas in Europe () has fallen since early April, amid understandings between Russia and Germany over how to pay for natural gas imported from Russia and alongside the supply of liquefied natural gas from the US, reducing investor fears of exacerbating the energy crisis in Europe.
At the same time, the end of the winter season reduces the demand for natural gas for domestic heating, which is expected to reduce the pressure on the market. However, demand from industry remained strong and Europe even began asking its citizens to reduce energy consumption due to fears of shortages and as part of efforts to reduce dependence on Russian energy.
This request indicates the concern in the European market, which if they increase further will lead to a resurgence in the price of natural gas in Europe.
| 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; Accelerating the easing of OPEC + production quotas, with an emphasis on countries with overcapacity. 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.
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.
Maintaining high energy prices could 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.