| Dr. Gil Befman, Chief Economist of Bank Leumi and Benyahu Bolotin, Economist, Leumi
| Development of the price of oil
The price of oil fell last week in the wake of the US administration’s decision to significantly increase its oil supply from its strategic inventory and the UK’s decision to supply oil from its reservoirs as well. At the same time, the rise in morbidity in China, which has led to a significant tightening of restrictions in the country, has increased fears of harming the demand for energy.
In a weekly summary, the price of type oil dropped to about $ 106 per barrel and the price of type oil dropped to about $ 100 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 group decided to further ease the production quotas of the group members and increased the quotas by 432,000 barrels per day. This increase, which is larger than the increase in production quotas of recent months amounting to 400,000 barrels per day, also reflects an increase in quotas resulting from a reassessment of the countries’ production capacity base, with the main beneficiaries of this change being Saudi Arabia and the United Arab Emirates.
However, it also reflects the approach of the group that supports the continued easing of production quotas in accordance with the original plan of increasing output gradually and without special increase in oil output in order to assist in a significant reduction in its market price.
In our opinion, the increase in the group’s oil production will be lower than the target, due to the expected decline in the oil production of Russia, which is a major oil producer, along with the inability of some of the group’s companies to increase their production capacity in the near future.
The UAE announced that the group’s cooperation with Russia would continue, despite the countries’ opposition to the Russian invasion of Ukraine. It is also the largest oil producer in the OPEC + group, opposed to increasing its oil production in order to fill the shortage of supply created as a result of the decline in Russian production due to the sanctions imposed on it.
It is not inconceivable that this is a combination of factors that led to this, including: a political statement by Saudi Arabia, which does not want to come out as a buffer against Russia; A position gap that has opened up in recent years between the US and Saudi Arabia; an expression of Saudi Arabia’s disappointment in terms of Western countries’ support for the Yemeni rebel war; and finally a demand for greater security guarantees regarding a possible Western agreement with Iran.
Russia is trying to cope with the decline in its energy sales to Western countries, by increasing supplies to Asian countries, particularly China and India, which purchase oil at a significant discount. India is considering a Russian proposal that payments for oil be through a Russian payment system that would allow payments through direct conversion between the rupee currency and the Russian ruble and without the use of the dollar or euro.
This decision has led to harsh criticism of India by the US and Australia as it will hurt the impact of the economic sanctions imposed on Russia. On the other hand, Poland plans to reduce its dependence on Russian oil and it will try to stop importing oil from Russia by the end of 2022. Reduce their dependence on Russian energy.
Canada has decided to increase its oil and natural gas exports in order to help countries trying to avoid buying Russian energy. In addition, the U.S. government plans to supply one million barrels of oil a day for six months (180 million barrels in total), with the goal of easing market price pressures.
The UK is also expected to supply oil to the market from its strategic reservoirs as part of an effort to reduce price pressures and help reduce dependence on Russian energy.
However, this step is expected to have only a short-term effect. Also, the increased oil supply from the reservoirs may be disrupted due to constraints on the transmission infrastructure resulting from the obsolescence of the infrastructure and the halting of development by the Biden administration.
US crude crude fell in the week ending March 25, 2022, due to an increase in refinery utilization rates and despite an increase in net imports. The EIA’s weekly report estimates that crude oil inventories fell by 3.4 million barrels Per week, to 409.9 million barrels in total, the lowest level since the end of September 2018.
The Biden administration calls on US oil companies to increase production. This is in contrast to the policy at the beginning of his tenure, which included tightening the activities of the energy sector for environmental reasons. The administration is also considering imposing economic sanctions on oil producers who do not use federal land to produce oil they lease.
However, the rise in metal prices, especially due to the current shortage in the market, is hampering the ability of US oil producers to increase oil production. This is because steel is an essential raw material for drilling new wells for oil production.
The US administration’s policy change is primarily intended to supply oil in the short term. However, the administration has not changed its policy regarding the medium and long term and it does not anticipate the sale of new drilling rights in the Gulf of Mexico at least until the last quarter of 2023.
| Global demand
High fuel prices weigh on demand, which has dropped to about 8.5 million barrels a day. The high price level increases fears of further disruptions in the supply chain in Asia, due to the damage to the profitability of shipping companies and truck drivers and other means of transportation. This is after the average price of diesel in South Korea has risen to a record level since 2008.
U.S. diesel exports have risen recently due to increased demand from customers in Europe and Latin America to purchase energy from a substitute source for Russia. Facing the alternative of exporting to other countries.
As a result, US Midwest refineries are less sensitive to this increase in competition and are expected to make larger profits. On the other hand, demand in China is expected to decline, due to rising morbidity in China, which has led to tighter restrictions in the country.
These concerns have even intensified following the publication of China’s procurement indices (), which indicate a contraction in activity, which could exacerbate the decline in demand.
Germany plans to gradually reduce fuel purchases from Russia, and almost completely stop imports by mid-2024. However, it noted that Europe can not impose an immediate embargo on the Russian energy sector, as such a move would hurt the European economy.
| The natural gas economy
The price of US natural gas continued to rise last week and reached $ 5.64 per MMBTU. This is as a result of the agreement signed between the US and the EU to increase the supply of liquefied natural gas (LNG) to European countries until the end of 2022. This agreement includes an increase Of at least 15 billion cubic meters of natural gas exports to be supplied to Europe by the US and other trading partners. This is in order to bring about a further reduction in natural gas imports from Russia to the European Union.
At the same time, the natural gas reserves in the US have started the season in which they are refilling, this season is expected to continue until September-October. Despite the expected increase in inventories, the current full level is 19.7% lower than last year The high ones.
The price of natural gas in Europe () rose last week, following an abnormal volatility in its price in the second half of the first quarter of the year. This price increase occurs after Russia announced that the payment for the sale of natural gas to “non-friendly” countries from the beginning of April will be only through and not through US dollars or euros.
Germany opposes payment in rubles and thus in effect the cessation of supply of natural gas to Russia is expected until an understanding is reached between the countries. Germany seems to have enough natural gas in its short-term reservoirs and is trying together with the US and EU countries to find alternative sources of energy supply.
If Germany and Russia do not reach an understanding on how to pay and also do not find sufficient alternatives for the supply of natural gas, the price of natural gas in Europe may rise significantly again.
| 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; Possible easing of sanctions on; Accelerating the easing of OPEC + production quotas, with an emphasis on countries with overcapacity. According to the IEA, the international energy organization, if the above background factors do not change in favor of increasing supply, the global oil market may be in short supply of about 3 million barrels per day this coming summer.
For now, the uncertainty regarding the nuclear deal with Great is even greater and the chances have increased that the agreement will not be signed in the near future. This is due to Iran’s recent demands from the US. As a result, market demand surpluses are expected to remain in the coming months.
Since it is doubtful whether all of the above supply side factors will materialize soon, the IEA believes that most of the effort should be invested today in reducing world oil consumption. These are multi-year processes and meanwhile, contrary to this recommendation, various countries are currently Reducing the tax rates on energy and thus working to preserve the level of demand and not the other way around – reducing the demand for oil.
Under these circumstances, 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.
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.