Oil market quarterly review

Q1 2022

Q1 2022

Executive summary

  • At the beginning of the year the world experienced a major geopolitical crisis, which could lead to disruptions to oil shipments and supply shock. Traditional channels for selling hydrocarbons were restricted as a result of sanctions imposed on Russia. Despite no direct restrictions on purchases of Russian oil from Europe, counterparties avoided Russian hydrocarbons supply chains, fearing secondary sanctions. Additional pressure on the oil supply was exerted by target volumes lagging behind OPEC+ production, as well as an accident at a CPC terminal on the Black Sea. Demand for oil rose following the recovery of the global economy and reached the level recorded at the start of 2019. However, further growth is likely to be curtailed by a looming recession caused by an escalation in geopolitical conflicts.
  • Supply chain gaps and concerns over growing market deficits led to record energy prices. In Q1 2022 the Brent oil price reached highs of over USD130/bbl. The Brent-Urals spread reached an historical maximum and exceeded USD35/bbl, following a rejection of Russian hydrocarbons. A combination of growing demand and limited supply has reduced commercial oil reserves to an eight-year minimum, which is also reflected in high oil prices.
  • In the coming months, the balance on the oil market will be determined by whether key consumers continue to import oil from Russia. It is not clear if a reduction in Russian volumes can be offset by imports from the US, OPEC countries, Iran, and Venezuela (if sanctions are lifted). The reasons are both a lack of available capacity (due to investment outflows in recent years) and the various interests of oil market participants. In the event of continued sanctions pressure, whether the balance on the oil market can be maintained will depend on whether global trade channels can be reoriented by increasing Russian exports to Asia.
  • The oil price forecast in 2022 ranges from USD85/bbl to USD135/bbl, with a median of USD100/bbl. This is explained by differing expectations regarding the consequences of oil supply shocks. Some analysts take a more radical position, holding that a Russian oil export embargo could trigger a jump in prices to USD200-250/bbl. However, this is unlikely as it would entail catastrophic consequences for the global economy.  In the long term the forecast quotes will not change significantly from the previous period, and are expected to decline from the current quotes to USD66/bbl by 2026.

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