Is the oil market temporarily overheated or is the specter of a shock worthy of 1973 in progress? While the economic situation and the war in Ukraine triggered by the Russian invasion last week pushed up the price of a barrel of crude oil close to 140 dollars – a record since 2008 – prices fell back below 100 dollars, for North Sea Brent for delivery in May. This is a first since the second day of the Russian-Ukrainian conflict. Yesterday in session, its price fell 6.53%, to end at 99.91 dollars, while the barrel of American West Texas Intermediate (WTI) for delivery in April fell 6.37%, to 96.44 dollars. However, prices remain up by more than 46% over one year. This morning, they rose slightly to go back above 100 dollars a barrel.
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“After falling more than 20% from last week’s highs, crude oil has entered bear market territory”commented Fawad Razaqzada, analyst at ThinkMarkets.
The war in Ukraine has created high volatility in oil markets in recent weeks. In this context, the International Energy Agency (IEA) estimated on Monday that “The prospect of large-scale disruptions to Russian production threatens to create a global oil supply shock.” On the demand side, the IEA has also revised down its growth forecast for 2022 by around 1 mb/d, due to the effect of the increase in commodity prices and the sanctions once morest Russia on the economy. world.
The resurgence of Covid-19 in China is impacting demand
But according to several analysts, it is not the impact of the conflict – and in particular the consequences for the moment limited by the American and British embargo on Russian black gold – which initiated a downward trend yesterday. But the resurgence of the Covid-19 pandemic in China. The Middle Kingdom had “biggest impact” on prices on Tuesday, argued Stephen Schork, analyst and author of the Schork Report. China’s decision to order the confinement of tens of millions of people to contain outbreaks of Covid “clearly raises concerns in the market regarding demand.”
China is by far the world’s largest importer of oil, with just over 10 million barrels per day.
“The risk on Chinese demand is real”, abounded, in a note, Louise Dickson, analyst at Rystad Energy, who mentioned a potential drop in consumption of half a million barrels per day linked to confinements. The analyst nevertheless warns that if, in the short term, a slowdown in Chinese demand is likely to lower the price of black gold, it might, in the longer term, aggravate supply problems with new closures. factories and generate more inflation.
“China has in the past shown its ability to quickly contain the spread (of the virus), and the impact on energy demand has only been apparent in the short term,” argues Bart Melek, head of commodity strategy at TD Securities.
Progress on the Iran deal
Still, the markets are also very attentive to the Russian-Ukrainian situation. With Russia being the second largest exporter of crude oil in the world, advances and the outcome of the war will alter the available supply. A resolution to the conflict in Ukraine “might lead to less severe sanctions once morest Russia and ease supply pressures,” explains Ricardo Evangelista, analyst at ActivTrades
Another factor contributing to the drop on Tuesday: Russia assured that it had received a guarantee from Washington that the sanctions aimed at it because of Ukraine would not concern its cooperation with Tehran, seeming to remove an obstacle to the relaunch of the agreement on the Iranian nuclear. A positive outcome of the negotiations would lead to the lifting of sanctions once morest Iran, a founding member of the Organization of the Petroleum Exporting Countries (OPEC). Iran’s market participation has been severely restricted since 2018 and the reinstatement of US economic sanctions by Donald Trump’s administration.
A return of Iran to full export capacity might reverse the current state of the world’s black gold supply. In 2020, the country produced nearly 2 million barrels per day but only exported 404,500, according to the OPEC website.
Precisely, OPEC is in the process of evaluating the effects of the war in Ukraine on world oil demand this year. The cartel has so far maintained its forecast of a 4.2 million barrel per day (mb/d) increase in crude demand this year, which should reach a total of 100.90 mb/d.
These producers are sticking to the course of action adopted a few months ago. Last week, they persisted in their approach of opening the floodgates to the dropper despite the conflagration of prices linked to the war in Ukraine, once morest the backdrop of fears for the supply. In reality, several members fail to reach their production quota.
The thirteen members of the Organization of the Petroleum Exporting Countries (OPEC), led by Riyadh, and their ten allies led by Moscow have agreed “to adjust their total production level upwards by 400,000 barrels per day for the month of April”announced the cartel in a press release following a brief meeting, with the result not surprisingly.
“This forecast is however likely to be modified in the coming weeks”, when there are more “clarity” on the effect of the geopolitical turbulence linked to the war in Ukraine, indicates the Organization of the Petroleum Exporting Countries (OPEC) in its annual report.
The United States is looking for oil all over the place
In recent weeks, another world oil producer has been in the spotlight in order to further supply the market in daily barrels: Venezuela. About ten days ago, Americans and Venezuelans announced discussions to lift the restrictions imposed by Washington for several years on its worst enemy on the continent – and former leading supplier of imported crude. Very early on, the United States decided to reopen the dialogue with Caracas with the aim, in particular, of covering in part the end of their importation of Russian hydrocarbons.
But White House spokeswoman Jen Psaki assured Monday March 14 that there was no “no active discussions currently” for purchases of Venezuelan oil by the United States, during his routine press briefing.
Venezuela has just released two Americans who were detained in the country, a move that has fueled speculation of a warming relationship with the United States, or even a resumption of American imports of Venezuelan oil,
At the same time, the States are turning to other black gold producers. To compensate for Russian oil imports, the White House turns to Saudi Arabia and the United Arab Emirates to ask them to increase their production. In addition to the fact that they are bound by the agreement which governs OPEC+, these two countries have set preconditions, as revealed by the Wall Street Journal.
It shows that the Saudis have set their conditions for increasing their oil supply: technological support and the sharing of information to support their military intervention in the civil war in Yemen, where they are facing Houthi rebels supported by Iran, a technological assistance to develop their own nuclear program and, last but not least, immunity for Crown Prince Mohamed bin Salman to travel to the United States. The same man Joe Biden accuses of ordering the assassination of Saudi journalist Jamal Khashoggi.
Brazil will increase its production
However, the United States can count on good news in recent days. The Brazilian government has told its counterpart in the United States that it will increase its oil production, the Brazilian Ministry of Mines and Energy learned on Monday, a decision which might help to allay concerns related to the global supply of crude. The Brazilian Minister of Mines and Energy, Bento Albuquerque, responded last Thursday to a request from his American counterpart, Jennifer Granholm, who had told him by videoconference of the importance of a possible increase in production from the Brazil.
Mme (Granholm) “asked me if Brazil might be part of this effort (produce more oil, editor’s note), and I said ‘of course it can’. We are already increasing our production, while the majority of countries of the OECD have reduced it. We have increased our production over the last three years”, Mr. Albuquerque said in a message sent by his ministry to AFP on Monday.
Latin America’s largest economy is among the ten largest oil producers in the world, with around 3 million barrels per day.
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(with agencies)
