Development of the price of oil
The price of oil continued to rise in the last week: the price of BRENT oil rose to about $ 97.59 a barrel at the end of the trading day on 11/2/2022 and the price of a WTI barrel rose to about $ 94.15. This rise in oil prices comes amid continued worsening geopolitical tensions between Russia and Ukraine and fears of a Russian invasion of the country, which could lead the US to impose sanctions on it and reduce Russian oil supply in the market.
Global supply
Saudi Arabia remains optimistic about the strength of global oil demand expected towards the end of the first quarter of 2022. This optimism has led to an increase in the premium on its oil that will be marketed vigorously to its customers in Europe, Asia and the US. Russia and Ukraine, along with rising demand due to the winter season and growing demand from the industry amid the recovery in economic activity. The near and estimated demand is expected to increase in 2022 by about 4.2 million barrels per day, an increase of about 4.3%.
Russia has announced that high oil prices could increase the country’s revenues in 2022 by about $ 65 billion. In her estimation, oil prices are expected to remain in their high environment and support the government budget. An examination of the Russian-Ukrainian conflict from an economic point of view may indicate that Russia has an interest in keeping the conflict on the global agenda in order to increase its revenues while avoiding civilian pressure, which would have increased at normal times due to high energy prices, through nationalist motives. However, this conflict seems to be broader and deeper than for the purpose of achieving financial goals. However, the threat of further sanctions may prevent the annexation of large parts of Ukraine, except for parts where there is a pro-Russian population.
High oil prices support increasing capital investment in the energy sector. These investments are also expected to grow in the US, with an emphasis on oil shale production, as the price of oil increases the economic viability of oil shale production, which is a more expensive production, which will support increasing US oil production in the next two years. The EIA has raised its forecast for expected growth in US oil production. It estimates that US oil production will rise to 11.97 million barrels per day in 2022 and in 2023 a further increase is expected, so that oil production will reach an average annual average of 12.6 million Barrels per day, the highest historical level in terms of annual averages.
The US oil inventory decreased in the week ending 2/4/2022 by 4.8 million barrels and reached 410.4 million barrels, the level lower than in May 2018 and is about 11% lower than the average level during this period in the last five years. This decrease occurred against the background A decrease in net oil imports, which was due to a decrease in gross imports along with an increase in exports, and despite the increase in the utilization rate of the refineries, which reached about 88.2% after falling continuously from the beginning of the year.
The general decline in U.S. oil inventories also led to a decline in oil inventories in the Cushing Reservoir, which has shrunk from about 37 to 28 million barrels since the beginning of the year. Fluent.
Global demand
Demand for car fuel in the U.S. rose in the week ending Feb. 4 from about 8.2 to about 9.1 million barrels per day. In doing so, demand converged back to the range of 8.9 to 9.6 million barrels per day, as they moved during most of the second half of 2021, as we expected. These strong demands, coupled with the limited supply in the market, support rising US fuel prices, which have reached the highest level in the last seven years, despite US administration attempts to reduce energy prices to the consumer. On the other hand, the demand for jet fuel fell slightly, but remained high at 1.4 million barrels per day. These demands are relatively low probably due to the high morbidity. However, the decline that began in morbidity is expected to support later in the year the increase in demand for flights. These demands are expected to support the expected decline in oil prices in the second half of 2022, which will support the strengthening of demand during the tourist season in the spring and summer months.
At the same time, fuel prices in Asia are also rising, amid rising demand for supplies and low inventory levels, leading to an increase in the marginal profit of Asian refineries that reached a higher level than it was before the spread of the corona virus. This, as a continuation of the upward trend in their marginal profit from the second half of 2020, after their profits were significantly hurt at the beginning of the spread of the corona virus.
The natural gas economy
The price of natural gas in the US (Henry Hub) fell last week to $ 3.96 per MMBTU. This, after an abnormal price volatility in the previous two weeks that led to a sharp rise in its price. 7.4% lower than the level in the corresponding period last year, has remained 1.2% higher than the average level in this period in the last five years, which indicates that if there is a further decrease in the price of natural gas, it will be gradual.
The price of gas in Europe (TTF) has fallen gradually in the last week and reached about 74 euros per MWh (about 24 dollars per MMBTU). This level is still very high compared to the price of European natural gas in the first half of 2021. This is due to the shortage of natural gas in Europe resulting from a shortage supply of natural gas from Russia to Europe. The uncertainty regarding the gas supply even intensifies against the background of tensions between Russia and Ukraine and the fear of a Russian invasion which will lead to economic sanctions on Russia which will exacerbate the shortage of natural gas in Europe which is dependent on Russian oil.
If a natural gas shortage solution is found in Europe by supplying gas from other countries, alongside continued shipments from the US, the US administration will have a better basis for imposing sanctions on Russia which may prevent it from invading Ukraine extensively. It is very difficult for the US administration to impose extensive sanctions on the Russian energy sector without severely damaging energy supplies to Europe.These tensions between Russia and Ukraine raise the chances that the crisis in the European natural gas market will continue in the near future. The European will return to the low levels that were until the exacerbation of natural gas shortages in Europe in the second half of 2021.
If tensions are resolved through diplomatic channels, Russia will return its natural gas supply to Europe and the price of European natural gas is expected to fall. This reduction will also be supported later, if the regulators approve the operation of the Russian Nord Stream 2 gas pipeline and if the US does not impose sanctions on the operation of this gas pipeline between Russia and Germany. And in particular German, in Russian natural gas which will also increase its political power in the region.
Expect medium-term
The OPEC + group is expected to increase oil production in March, in line with a decision made at its last meeting, and there may also be further relief in production quotas in April which will increase oil production by an additional 400,000 barrels per day. However, actual output is expected to increase less than the increase in production quotas, as some group members have exhausted most of their excess production capacity for the time being. 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. It seems that the rise in morbidity in the current wave has not significantly hurt energy demand, and the continued recovery in economic activity supports OPEC +’s policy of easing production quotas.
As mentioned at the outset, the recent rise in oil prices is mainly due to tensions between Russia and Ukraine. Russia’s invasion of Ukraine could lead to Western sanctions on Russia, which could further raise the price of oil in the short term, depending on the intensity of the geopolitical escalation. On the other hand, resolving the conflict diplomatically, if at all possible in the short term, and surprising the removal of the threat over Ukraine, can lead to a halt in the rise in the price of oil. In addition, progress in talks between Iran and the superpowers may ease the sanctions on the Iranian energy sector, which will increase oil supply in the medium term in the future while reducing the price of oil in the future. Oil futures indicate a certain drop in price, in the first half of 2022 and a further drop during 2023. This is probably due to expectations that oil supply will increase in 2022, and there may even be some supply oversight, alongside monetary policy tightening in many countries.
By: The Chief Economist of Bank Leumi, Dr. Gil Michael Befman