| Dr. Gil Befman, Chief Economist of Bank Leumi and Benyahu Bolotin, National Economist |
| Oil price development:
The price of oil continued to fall last week amid the spread of the corona virus in China, which led to tightening restrictions in the country, which reduced demand forecasts, along with the decision of the US administration and other countries to increase oil supplies from strategic stocks.
In a weekly summary, the price of type oil decreased to about $ 101.91 per barrel and the price of type oil decreased to about $ 98.96 per 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 high price of oil supports easing the production quotas of the OPEC + group, which allows the member countries of the group to increase their oil production. However, the group found it difficult to increase oil production significantly and it is estimated that it increased production in March by only 90,000 barrels per day, about a third of the planned increase.
This is due to the difficulty of some of the companies in the group to increase their oil production capacity, along with the refusal of and, who have not yet exhausted their production capacity, to increase oil production to compensate the market for the decline in Russian oil production and due to some customers’ refusal to purchase Russian oil .
At the same time, tensions in Libya between the government and local factions are floating again and could lead to disruptions in oil production, and in particular Libya’s oil exports, which could further hamper supply in the market.
Excess demand in the market has led to an increase in Saudi Arabia’s oil prices for all customers. As a result, oil buyers in Asia are expected to move to purchasing more oil from the U.S. and other oil producers in the Middle East, which will sell the oil at a cheaper price.
Also, the lack of a significant increase in the oil output of OPEC companies, supports the supply of oil to the market from the US strategic reservoirs in order to alleviate the price pressures.
The United States and the European Union are planning to impose further sanctions on Russia following the revelations about the killing of civilians in Ukraine. Sanctions on Russia’s oil and natural gas sector, but the president of the European Commission said they would advance a discussion on dealing with the Russian oil sector.
This announcement of the plan to tighten sanctions on Russia has contributed to market price pressures, although sanctions on Russian oil are not expected. This is because as sanctions increase, more and more customers are voluntarily seeking oil from non-Russian producers.
At the same time, the war in Ukraine and the sanctions imposed on Russia are causing an increase in the price of shipping oil by sea. This is partly due to companies’ avoidance of using Russia’s oil tanker fleet, which increases the demand for other oil shipping companies.
The supply of oil to the market from the strategic reservoirs of the countries is expected to increase. This is due to the decision of the US partnership in the IEA to increase the supply of oil to the market by 60 million barrels of oil from their reservoirs, in addition to the oil that the United States has supplied to the markets from its reservoirs.
India, the third largest oil importer in the world, has announced that it will also examine how it can support the emergency plan to supply oil to the markets from the reservoirs, but we estimate that it will not be able to supply a significant amount of oil to the market.
Past experience indicates that the supply of oil to the market has a short-term effect, but in the medium term the market will be affected mainly through the increase, or lack of increase, of the supply of oil to the market by the oil producers.
US trade rose in the week ending April 1, 2022, despite the continued increase in the utilization rate of refineries and the decrease in net imports.
The EIA’s weekly report estimates that crude oil inventories have risen by 2.4 million barrels per week, to about 412.4 million barrels in total, but this level is about 14% lower than the average level during this period in the last five years.
Price ranges between the WTI and the BRENT have narrowed recently, with the decline in oil prices and the rise in b.
The U.S. administration has begun pursuing a policy of asking U.S. oil producers to increase oil production in order to increase oil supply in the short term, but on the other hand it continues to refuse to sell new oil drilling rights in the Gulf of Mexico until 2023, for environmental reasons. Oil production.
Democrats in Congress accuse the major energy companies of exploiting the war in Ukraine of raising oil prices and profits and of not significantly increasing oil production. On the other hand, energy companies said that in order for them to increase oil production, new drilling is needed, so the administration needs to issue drilling permits in order for them to increase oil production.
It should be noted that over the past year energy companies have reduced their capital investments, which prevents them from rapidly increasing oil production.
| Global demand
High fuel prices continue to weigh on demand, which remains around the level of 8.5-8.6 million barrels per day. Fuel and diesel, which are used for land transportation, have the greatest impact on the end consumer. However, the biggest change in the market has recently been in jet fuel due to the significant rise in its price in the US which has reached the highest level since 1988.
This high price raises the concern about raising the prices of airline tickets or that the companies will choose to reduce the flights. This increase in price occurs against the background of the low level of stock of jet fuel and the desire of the US to refill these reserves along with expectations of an increase in demand for flights with the opening of the tourist season in the spring and summer months.
U.S. efforts to replenish jet fuel reserves have contributed to the recovery of the jet fuel market in Asia that began against the backdrop of easing restrictions on social distance in some countries.
Tightening the restrictions on social distance in China continues to weigh on demand in the country and leads to a reduction in market demand forecasts. Traffic during peak hours in Shanghai fell by 40%, compared to the same period last year, which reduces the demand for fuel and diesel used for transportation.
This decline in demand has led to a reduction in the utilization rate of state-owned refineries in China, which according to market estimates reached the low level of 77.5% in the first week of April. On the other hand, in Argentina there is a strong demand for diesel fuel, due to its use in tractors and trucks which increases with the arrival of the soybean harvest season.
However, there is a shortage of diesel in the country which could hurt the agricultural industry and disrupt supply chains. These disruptions may even exacerbate supply disruptions in other countries that import agricultural products from Argentina which is the world’s largest exporter of soy and soybean oil and is the third largest supplier of corn in the world.
| The natural gas economy
U.S. natural gas prices continued to rise last week and reached $ 6.36 per MMBTU. This is in contrast to the downward trend in the oil market. The price increase is due to high demand for natural gas in Europe, which increased liquefied natural gas (LNG) imports from the US “As imports from Russia have declined.
This demand from Europe is expected to continue until the end of 2022. At the same time, there is a decrease in the level of natural gas in the US reservoirs. However, this decrease is temporary and the reservoirs are expected to fill again in the coming weeks.
The level of inventory in the reservoirs is very low, about 22.4% less than the level in the corresponding period last year and about 17.1% less than the average level this season over the past five years, which also supports the high price of natural gas in the US.
On the other hand, the price of natural gas in Europe () fell slightly in the last week, after Germany and Russia reached an understanding on how to pay for natural gas following a Russian demand that the payment for gas be in rubles and not in euros or dollars.
Under the agreement, the payment will be made through the mediation of Gazprom Bank so that Germany will transfer the payment in Euros or Dollars to Russia through Gazprom Bank and the Bank will convert the payment into Russian Rubles and transfer it to Russia.
These agreements reduced the market fear of stopping gas supplies from Russia to Europe, which contributed to a certain decline in the price of natural gas in the European market.
| Expect the 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; Acceleration of OPEC + production quotas, with 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.
Keeping energy prices at a high level could hamper the growth of global activity, with the main victims being expected to be industrial-oriented countries.
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.