| Dr. Gil Befman, Chief Economist of Leumi, and Benyahu Bolotin, Economist in the Economics Division |
| Oil price development:
The price of oil has fallen sharply in the last two weeks from the high level it has temporarily reached, due to the fear of market shortages against the background of the sanctions imposed on Russia in response to its invasion of Ukraine. In a weekly summary, the price of type oil decreased from about 116.6 to about $ 111.97 per barrel at the end of the trading day on 3/18/2022 and the price of a type of barrel decreased from about 111.1 to about $ 106.15.
| Global supply
Oil has been trading in the last two weeks at a wide price range of about $ 30 a barrel after the price of a Brent barrel temporarily reached more than $ 130. The drop in price over the past week was due to the easing of tensions over the outbreak of war in Ukraine to other European countries as well as alongside talks between Russia and Ukraine that could bring an end to the fighting in Eastern Europe.
The declines occurred despite the cessation of talks regarding the nuclear agreement between the powers and Iran, which could delay the signing of a nuclear agreement and consequently also the supply of Iranian oil to the market.
Despite the drop in the price of oil, it remained at a relatively high level due to the excess demand in the market due to the fact that a number of governments are banning Russian oil imports, along with other customers who had to Russia who started buying oil from other suppliers.
In an attempt to deal with the situation that has arisen, Russia has lowered the price of oil significantly and yet it has failed to sell some of its oil barrels. However, China is expected to return later to purchase oil from Russia and enjoy the low energy prices as part of these purchases.
The UK has begun talks with Saudi Arabia and the United Arab Emirates, in order to support a broader easing of production quotas and an increase in OPEC +. This, in order to reduce the price of oil and alleviate world inflationary pressures.
Alongside this, Libya also supports a further increase in production quotas and an increase in OPEC oil production. However, Libya’s influence in the group is relatively small and it is likely that the OPEC + decision will be made in accordance with the opinion of Saudi Arabia, which has not yet given any guarantees to Britain regarding increasing productivity.
The rise in the price of oil raises the profits of American energy companies which do not significantly increase their oil production. This situation has increased tensions between the White House and U.S. energy producers, as a continuation of past tensions over the administration’s policy of reducing the U.S. energy sector out of environmental motives. Now, the administration wants energy producers to increase the rate of oil production in order to ease inflationary pressures and reduce the price of fuel to the consumer.
The US administration has the option to oblige energy companies to increase oil production rigs in order to increase energy production, as it did during the Cold War, but for now, the administration has not yet chosen to exercise this authority and prefers to try to influence the market through oil supplies from strategic reservoirs.
Moreover, U.S. oil producers are limited in their ability to increase output, due to the shortage of workers and raw materials. The administration has not resolved this bottleneck, so even if it tries to persuade and even force oil companies to increase their output, operational difficulty will not increase rapidly It should be noted that the supply of oil from these reservoirs has a temporary effect on the market, so that if the crisis continues over time, then the United States will not be able to continue to supply oil on a regular basis.
In the US, it increased by 4.3 million barrels in the week ending March 11, 2022. This large increase occurred despite an increase in the utilization rate of refineries that reached 90.4% and a decrease in net oil imports, which was due to an increase in exports rather than an increase in gross imports. At the same time, the reservoir in Cushing has risen as well, stabilizing at over 20 million barrels.
| Global demand
Demand for car fuel in the United States fell slightly in the week ending March 11 to about 8.9 million barrels a day. B, which weighs on local demand.
Demand for jet fuel has also dropped to about 1.4 million barrels a day, due to rising oil prices that also affect the price of jet fuel. In our estimation, the demand for jet fuel is expected to grow later in the year, especially during the tourist season in the spring and summer months, when the demand for flights increases.
Fuel and diesel sales in India rose in the first half of March by about 33% compared to February last year, due to early fuel purchases resulting from expectations of rising fuel prices. On the other hand, the tightening of restrictions in China, against the background of the spread of the corona virus, has led to a decrease in traffic on the roads of major cities in China where the closure has been imposed, which is also expected to lead to a decrease in demand.
However, China continues to prioritize the energy consumption of the domestic economy, in order to ensure continuous supply, and it has reduced fuel exports in the first two months of 2022 by about 47%, compared to the same period last year. Rising demand in India, coupled with declining China’s fuel exports and declining energy trade with Russia, are increasing the excess demand for fuels in the market.
| The natural gas economy
The price of natural gas in the United States () rose last week, to about $ 4.99 per MMBTU. For natural gas in Europe.
The natural gas reserves are expected to start filling up again during the month of April, which will support the alleviation of the excess demand that exists in the market. Alongside this, the winter season is coming to an end and the demand for natural gas is expected at least due to the decline in demand for domestic and business heating.
The price of gas in Europe () fell last week, following the decline of the previous week, reaching about 100.4 euros per MWh. This is against the background of the reconciliation talks between Russia and Ukraine, which slightly lowered the geopolitical tensions and the fears of the war spreading to other European countries.
However, the high dependence of the European market on Russian natural gas supports its price, which remains in a very high environment. As part of the sanctions, Germany has further delayed the procedure for approving the operation of the Russian gas pipeline Nord Stream 2. Without these bureaucratic permits, Russia will not be able to operate the gas pipeline intended for gas transmission underwater directly from Russia to Germany. However, Germany opposes a full boycott of the Russian energy sector.
As the winter season draws to a close, demand for natural gas in Europe is expected to decline due to the expected decline in demand for natural gas for domestic and business heating. In addition, the supply of liquefied natural gas (LNG) from the US, Asian countries and other countries will support in the medium term the decline in natural gas prices.
Alongside this, tensions in Eastern Europe have led to the acceleration of a European plan to reduce their dependence on Russian energy, which will lead in the medium term to a significant drop in the price of Russian natural gas.
| Expect medium-term
The price of oil is expected to be affected by the following factors: continued geopolitical tensions over the fighting; The degree of progress towards a nuclear agreement between the superpowers and Iran; Possible easing of sanctions on; Accelerating the easing of OPEC + production quotas, with an emphasis on countries with overcapacity.
To the extent that the US administration eases the economic sanctions imposed on Venezuela’s energy sector, it is expected to increase its oil exports, but at a slower pace due to its dilapidated infrastructure.
The OPEC + group will increase oil production in April, in accordance with the decision made, and if the price pressures continue over time, there may be a greater increase in oil production in May. Actual output, however, is expected to increase less than the increase in production quotas (400,000 barrels per day), as some group members have exhausted most of their excess production capacity, for now.
In addition, the group is expected to continue its policy of easing production quotas in May, and even greater temporary relief is possible. Therefore, the major oil producers in the OPEC Group are likely 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 find it difficult to increase oil production.
The high price level, together with the sanctions imposed on Russia, which reduce its demand for oil, increase the economic viability of the major oil producers that are members of OPEC to deviate from production quotas and increase oil production. This is because until the imposition of sanctions, Russia was the leading force among the member states of the OPEC + group that are not members of the OPEC group and it posed a threat of being dragged into a price war, as occurred in March-April 2020.
However, if sanctions on Russia remain long-term, it appears to have a lasting effect on oil demand even though sanctions will only partially include Russia’s energy generation sector.
In this scenario, Russia will not be practically committed to OPEC +’s production quotas, and group members will be able to make decisions without regard to Russia and without Russia’s involvement in the extended group it joined about six years ago. This scenario concerns the medium term and if realized, OPEC members are likely to continue with the current policy of gradually increasing oil supplies, with Russia’s quotas being distributed among other members of the group.
The main beneficiaries of such a decision are likely to be the United Arab Emirates, and it is also possible that they are large oil producers and have not yet exhausted their oil production capacity. However, in the short term, the OPEC Group cannot immediately supply all the oil that Russia has supplied.
As long as Russia is free from OPEC + restrictions, and if sanctions do not widely include its energy sector, Russia will be free to increase its output in the future. Such a move may reflect an attempt by the Russian government to greatly increase the country’s revenues from natural resources, as a key part of dealing with the deep economic crisis it is now entering.
The Russian invasion of Ukraine continues to support a high level of oil prices in the immediate term, and even a further rise in case of further escalation. According to the EIA, prices may rise in the coming months due to the shortage created by the supply side.
However, if heavy fighting is limited in time, with no direct leakage to neighboring countries, this increase is expected to be temporary and oil producers are expected to further increase their oil output, which will support back oil prices lower than current peak levels, towards the end of 2022.
Futures contracts indicate a certain decline in price, in the second half of 2022 and a further decline during 2023.
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.