CRUDE oil prices have surged since Russia’s invasion of Ukraine, and other geopolitical supply risks globally and the latest uncertainty stemming from the EU’s Russian ships insurance ban are set to stoke even more volatility and keep oil prices elevated amid robust demand.
Platts Analytics, part of S&P Global Commodity Insights, is expecting Dated Brent to average US$100-US$115/b through the rest of the year and the market to remain in a cycle of two steps forward, one step back.
Global oil demand in May took one step forward with a sequential growth of 1.7 million b/d after two months of declines, Platts Analytics said in its latest Commodities Brief.
“Quarter-over-quarter demand recovery will continue in June, bolstered by motor gasoline and jet fuel consumption, which are hallmarks of the seasonal summer demand gains. But all eyes will be on China in the coming weeks as the country starts to emerge from lockdowns,” it said.
“China’s demand recovery in the second half of the year could be another step forward – or step back – hinging on whether or not lockdowns can be broadly lifted on a sustained basis,” it added.
Despite China’s wild card role, oil demand growth in the rest of Asia is set to be “solid,” with Platts Analytics forecasting Asia’s oil demand to climb by 0.9 million b/d in 2022, driven primarily by India, and by countries such as Indonesia, Singapore, Malaysia, Thailand, the Philippines and Vietnam as economic activity accelerates.
Platts Analytics projects India’s oil demand to grow by 245,000 b/d in 2022 and Southeast Asia’s oil demand to rise by 0.5 million b/d this year.
Russia’s seaborne crude exports have not tapered significantly despite strict sanctions, reflecting continued purchases by buyers in India and China.
Until Russia’s invasion of Ukraine, India very rarely bought Russian oil. However, with Russian crude trading at record lows in recent months, the country’s refiners have changed their crude diets. Chinese demand for Russian ESPO crude has also been robust despite the recent lockdowns, with its reliance on Brazilian shipments dwindling and ultimately falling to zero in May for the first time since January 2016.
At least nine cargoes of Russian Urals, amounting to 880,000 mt, are set to arrive in Shandong for independent refineries in June, with six cargoes scheduled to head to Qingdao port, two to Yantai and the rest to Rizhao, S&P Global reported earlier this month.
EU stringent moves set to pinch
The EU published details of its sixth sanctions package against Russia June 3, including phasing out Russian crude imports in six months and refined products in eight months.
Several insurance companies had already been refraining from providing insurance cover to ships in which Russian entities had financial stakes and non-Russian ships carrying Russian cargoes since the Ukraine war began.
The EU’s sixth sanctions package further prohibits EU operators from insuring and financing the seaborne transport of Russian oil to third countries after a wind-down period of six months.
With the latest explicit sanctions against insuring Russian ships, those carrying cargoes to and from Russia will do so at their own risk and invite stringent penalties if their voyages are detected.
While uncertainty abounds as to how sweeping this ban could be for global oil markets, the new importing and shipping insurance sanctions will likely lead to crude exports gradually declining over the next six months by 2 million b/d, Platts Analytics predicted.
Regardless of what the details say, disruptions in trade flows will occur and vessels will likely be out of position for some time to come, sparking more concern in a market that is already on tenterhooks.
OPEC+ decision a temporary reprieve
While Asia is breathing a temporary sigh of relief amid growing expectations of easing availability from OPEC+ and the US, any potential signs of weakness are being offset by other bullish considerations.
Crude oil production from OPEC and its Russia-led allies rebounded modestly in May from a steep drop in April but remained well short of its collective quota, according to the latest Platts survey, with the group underproducing its target by 2.616 million b/d and compliance at a lofty 182.5%, according to S&P Global calculations.
OPEC+ on June 2 announced it would raise quotas by 648,000 b/d for July and another 648,000 b/d for August — about 50% higher than the recent monthly increases.
US strategic petroleum reserve releases are ramping up quickly, adding 800,000-1 million b/d of supply in recent weeks.
However, major Asian refiners and crude importers are wary of the possibility that a significant portion of the incremental Middle Eastern supply could go to end-users in Europe, leaving Asian customers at
the back end of the buying queue.
Other geopolitical supply risks abound, too. An Iran deal, which seemed promising just two months ago, has gone cold again. Libya production rebounded modestly but remains at risk and the cease fire between the Houthis and Saudi Arabia expired in early June.
And to top it all, oil demand growth shows no signs of abating.
“For 2023, we expect global oil demand growth of 2.5 million b/d, which will allow demand to average 103.8 million b/d, about 1 million b/d above the average 2019, pre-pandemic level,” Platts Analytics said in the Commodities Brief, adding that the oil market should brace for continued volatility in the coming months.
Surabhi Sahu, Senior Editor, S&P Global Commodity Insights.