Development of the price of oil
The price of oil rose in the last week: the price of BRENT oil rose to about $ 97.68 per barrel at the end of the trading day on 25/2/2022 and the price of a WTI barrel rose to about $ 94.09. This increase occurred against the background of Russia’s invasion of Ukraine which entailed economic sanctions from Western countries. The fear of the impact of sanctions that will include the Russian energy sector, or an initiated reduction of Russian energy supply to Europe, is reflected in the expectation of an exacerbation of the energy crisis in Europe and will increase the excess demand.
Global supply
Following on from the above, US sanctions on Russia have so far led to a rise in oil prices, although the sanctions do not prohibit the purchase of energy from Russia. Russia could also respond to sanctions imposed on it by the West and reduce its supply of oil and natural gas to Europe, leading to a further rise in energy prices.
Against the background of geopolitical developments between Russia and Ukraine, Saudi Arabia has announced that the OPEC + group, which is a collaboration between OPEC and other Russia-led countries, will continue to cooperate over time. In doing so, it seeks to reduce the impact of geopolitical changes on cooperation between OPEC and Russia designed to maintain the stability of the global energy market. At the same time, Saudi Arabia’s oil company predicts that demand will continue to recover with the passing of the corona virus omicron wave, with an emphasis on demand in the Asian market, which supports oil prices and could increase market demand.
The OPEC + group is expected to convene this week, as part of the monthly meetings to assess the oil market and set policy for the coming period. Some members of the group want to continue with the current policy of easing production quotas every month by 400,000 barrels per day, and they are interested in increasing oil production in accordance with this policy in April as well. Nigeria and Iraq are among the companies supporting the increase in production quotas. However, they stressed their opposition to increasing quotas more than the policy so far, a monthly increase of 400,000 barrels per day, despite rising oil prices.
The high oil prices support an increase in the oil output of the group members, but it is not yet clear how Russia will respond to this request and whether it will also support further policy of easing production quotas. In our view, as long as Western countries do not impose sanctions on the Russian oil market, Russia will support an increase in oil production and a reduction in production quotas. If the sanctions imposed by the US and European countries also include the Russian oil market, OPEC + is likely to continue its easing policy when there is no enforcement on Russia, similar to the policy taken against Iran after the US imposed sanctions on its energy sector. We emphasize that imposing sanctions on the entire Russian energy sector will also hurt European countries, as a significant portion of their energy imports originate in Russia, which reduces the likelihood of this scenario as long as no suitable alternatives are found for the European market.
Talks between the powers and Iran in an attempt to return to the nuclear deal are expected to continue, despite the geopolitical tensions exacerbating tensions between the US and Russia. Refining that they are potential customers, so that if an agreement is signed, the oil supply is expected to increase significantly temporarily and meet the excess demand. In addition, Iran is expected to add about 2-2.5 million barrels of oil per day, from current production, which will also help ease Prices In our opinion, the OPEC + group will include Iran in its production quotas, since Iran is a member of OPEC, but the enforcement of quotas on it is expected to be gradual.
US oil inventories increased in the week ending 18/2/2022 by 4.5 million barrels, the largest increase since the end of September 2021, and reached about 416.0 million barrels. This increase occurred against the background of an increase in net oil imports, which resulted from a gross increase in imports More than the increase in exports, and despite an increase in the utilization rate of the refineries, which reached about 87.4%. On the other hand, the oil inventory in Cushing decreased by about 2.0 million barrels, as a continuation of the declining trend in recent weeks. Of 20 million barrels which is estimated as an environment of the threshold below which there is an operational risk to the oil reservoir.
The gap between the price of WTI oil and the price of BRENT oil rose sharply last week to $ 6.2 a barrel, the largest gap since the end of January 2020. These price differences stem from the fear that Russia’s invasion of Ukraine will lead to disruptions in oil supplies in Europe and the North Sea. These concerns affect the price of BRENT more than US oil (WTI). Alongside this, the US administration appears to be considering additional supplies from the Federal Reserve’s strategic reservoir, along with oil supplies from the strategic reservoirs of other countries, in order to ease price pressures especially among oil-consuming countries. However, China, the world’s largest oil consumer, has announced that it will not supply oil from the reservoirs for the time being.
Global demand
Demand for car fuel in the U.S. rose slightly in the week ending Feb. 18 to about 8.7 million barrels a day. Given the geopolitical tensions in Eastern Europe, oil could weigh on demand in the short term, but the expected decline in fuel prices in the medium term will further support rising demand back to where it was in the last half of 2021.
At the same time, the demand for jet fuel has not changed significantly and it remains at the level of about 1.5 million barrels per day. This level is in the range of demand that was in the last half of 2021, after the recovery of demand, and is supported by the decrease in morbidity that partially offsets the increase in prices that weigh on demand. However, demand is at the lower limit of the range where it was before the spread of the corona virus, which indicates that with the decline in morbidity and the continued decline in energy prices, demand for jet fuel is expected to rise. This, with an emphasis on the tourist season in the spring and summer months that is expected to support the increase in demand for flights.
India, the third largest fuel consumer in the world, is expected to increase demand for oil. This is in order to fill the emergency inventory against the background of the growing demand from the refineries in the country in order to increase their utilization rates in order to meet the growing demand.
The natural gas economy
The price of natural gas in the United States (Henry Hub) continued to rise last week to $ 4.64 per MMBTU. From the level that was in the corresponding period last year and from the average level in this period in the last five years, which supports the prices of natural gas.
Russia’s invasion of Ukraine also led to an increase in the price of gas in Europe (TTF) which reached about 90 euros per MWh (about 40 dollars per MMBTU). This is due to fears of exacerbating the shortage of natural gas in Europe as a possible response on the part of Russia to the sanctions imposed by Europe and the US. Gas intended for direct gas transmission from Russia to Germany Reducing the supply of Russian gas to Europe could further increase the price of European natural gas significantly in the short term. For domestic and business heating.In addition, increasing the supply of liquefied natural gas (LNG) from the US and Asian countries will also support in the medium term the decline in natural gas prices.
Expect the medium term
The price of oil is expected to be affected by the following factors: the geopolitical tension between Russia and Ukraine; The nuclear agreement between the superpowers and Iran; OPEC + production quota relief policy. If a nuclear agreement is signed with Iran, it will increase the oil supply in the market quickly, out of the stocks in its existing oil reserves.
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. Actual output, however, is expected to increase less than the increase in production quotas, as some members of the group 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.
The Russian invasion of Ukraine supports a continued rise in oil prices in the near term, but assuming that fighting is limited in time, this increase is expected to be temporary and oil producers are expected to further increase their oil production, which will support lower oil prices. . Oil futures indicate a certain decline in price, in the second half of 2022 and a further decline during 2023. This is probably due to expectations that oil supply will increase during 2022, and there may even be some surplus supply towards the end of the year, along with tightening monetary policy. Multi of countries.