CRUDE oil prices have surged since Russia’s invasion of Ukraine, and other geopolitical supply risks globally and the latest uncertainty stemming from the ship insurance ban by the EU should stoke even more volatility and keep oil prices high amid robust demand.
Platts Analytics, part of S&P Global Commodity Insights, expects Dated Brent to average between USD 100 and USD 115/bbl for the remainder of the year and the market to remain in a two step cycle. forward, one step back.
Global oil demand in May took a step forward with sequential growth of 1.7 million barrels per day after two months of declines, Platts Analytics said in its latest Commodities Brief.
“The quarter-over-quarter demand recovery will continue into June, supported by motor gasoline and jet fuel consumption, which characterize seasonal gains in summer demand. But all eyes will be on China in the coming weeks as the country begins to emerge from lockdowns,” he said.
“The recovery of demand in China in the second half of the year could be another step forward – or a step back – depending on whether or not the blockages can be lifted globally in a sustainable way,” he said. he adds.
Despite China’s wildcard role, oil demand growth in the rest of Asia is expected to be “solid”, with Platts Analytics forecasting Asia’s oil demand to grow by 0.9m bbl/ d in 2022, driven primarily by India and by countries such as Indonesia, Singapore, Malaysia, Thailand, the Philippines and Vietnam as economic activity picks up.
Platts Analytics predicts that oil demand from India will increase by 245,000 bpd in 2022 and oil demand from Southeast Asia will increase by 0.5 million bpd this year.
Russian exports of maritime crude did not decline significantly despite tough sanctions, reflecting continued buying by buyers in India and China.
Until Russia invaded Ukraine, India very rarely bought Russian oil. However, with Russian crude trading at record highs in recent months, the country’s refiners have changed their crude feed. Chinese demand for Russian ESPO crude has also been robust despite recent shutdowns, with its reliance on Brazilian shipments waning and eventually falling to zero in May for the first time since January 2016.
At least nine shipments from Russian Urals, amounting to 880,000 tonnes, are expected to arrive in Shandong for independent refineries in June, with six shipments expected to head to Qingdao port, two to Yantai and the rest to Rizhao, S&P Global reported. earlier this month. .
Strict EU measures should pinch
The EU released details of its sixth set of sanctions against Russia on June 3, including phasing out Russian imports of crude oil in six months and refined products in eight months.
Several insurance companies had already refrained from providing insurance coverage to ships in which Russian entities had financial stakes and to non-Russian ships carrying Russian cargo since the start of the war in Ukraine.
The sixth EU sanctions package further prohibits EU operators from operating and financing the maritime transport of Russian oil to third countries after a six-month transition period.
With the latest explicit sanctions against Russian ship insurance, those transporting cargo to and from Russia will do so at their own risk and face severe penalties if their voyages are detected.
While uncertainty reigns over the extent of this ban for global oil markets, the new import and shipping insurance sanctions will likely lead to a gradual decline in crude exports over the next six months by 2 million barrels per day, predicted Platts Analytics.
Regardless of what the details say, disruptions to trade flows will occur and ships are likely to be out of position for some time to come, raising further concerns in an already strained market.
OPEC+ decision a temporary reprieve
As Asia breathes a temporary sigh of relief amid rising expectations for easing availability from OPEC+ and the US, any potential signs of weakness are offset by other bullish considerations.
Crude oil production by OPEC and its Russian-led allies rebounded slightly in May after a sharp decline in April, but remained well below its collective quota, according to the latest Platts survey, the subgroup delivering its target of 2.616 million bpd and 182.5% compliance, according to S&P Global calculations.
OPEC+ announced on June 2 that it would increase quotas by 648,000 bpd for July and an additional 648,000 bpd for August, about 50% more than recent monthly increases.
Releases of strategic oil reserves in the United States are increasing rapidly, adding 800,000 to 1 million bpd of supply in recent weeks.
However, major Asian refiners and crude oil importers fear that a significant portion of the additional supply from the Middle East could go to end users in Europe, leaving Asian customers to
the back end of the shopping queue.
Other geopolitical supply risks also abound. A deal with Iran that looked promising just two months ago has gone cold again. Libyan production has rebounded slightly but remains under threat and the ceasefire between the Houthis and Saudi Arabia expired in early June.
And to top it all off, oil demand growth shows no signs of slowing down.
“For 2023, we expect global oil demand to grow by 2.5 million bpd, which will allow demand to average 103.8 million bpd, or about 1 million bpd. /d above the 2019 average, pre-pandemic level,” Platts Analytics said in the Commodities Brief, adding that the oil market should brace for continued volatility in the months ahead.
Surabhi Sahu, Editor, S&P Global Commodity Insights.