Crude prices swing as Covid surges, strategic oil releases loom, OPEC slashes forecast in wake of war

Russia’s war in Ukraine threatens global crude supplies, but a resurgence of the coronavirus in China is dampening demand as the United States and other countries prepare to release oil from strategic reserves. Result: volatile prices.

Brent crude prices climbed more than 6% on Tuesday to around $104 a barrel intraday following OPEC Secretary General Mohammad Barkindo’s warning in a speech that the war could ultimately reduce much more global sourcing.

“We could potentially see the loss of more than 7 million b/d of Russian oil and other liquids exports, resulting from current and future sanctions or other voluntary actions,” he told members. of the European Union (EU). “Given the current demand outlook, it would be almost impossible to replace a loss of volumes of this magnitude.”

OPEC also officially lowered its expectations for 2022 oil production and demand on Tuesday, with researchers pointing to heightened uncertainty on both fronts.

The day marked another in a series of sharp turns for the oil market.

Brent prices, the international benchmark, hovered around $130/bbl at their 2022 peak in March, when the fallout from economic sanctions on Russia sparked fears of an imbalance between supply and demand. In protest against Russia’s invasion of Ukraine, the United States banned imports of Kremlin-backed oil, and other countries followed suit, pushing back more than a million bpd from the International market.

“It was obvious that replacing such a large amount of oil would be a colossal undertaking,” said Michael Haigh, head of commodities research at Societe Generale Group. However, “prices retreated on concerns over demand due to an increase in coronavirus cases, particularly in China, which was experiencing the worst Covid-19 outbreak in two years.”

The bear case

Indeed, on Monday, the Brent June contract had fallen well below $100 as supplies to China were suspended due to a pandemic rebound in Shanghai, China’s largest city, and other markets. from the country. China is the largest oil importer in the world. Shanghai and other Chinese cities have been closed in recent weeks, limiting mobility and decreasing the need for petroleum-based travel fuels.

Despite the restrictions, Chinese authorities reported more than 26,000 new daily infections in Shanghai on Sunday, a record for the city.

At the same time, virus cases have risen again in parts of Europe. US officials have warned that the new, fast-spreading Covid subvariant began to impact Americans this spring, creating a wildcard as the weather warms and travel generally resumes before summer.

In the United States, more than 31,000 new cases of the virus were reported early this week, up about 3% from two weeks earlier, according to federal data. In some major cities on the East Coast, however, cases have jumped more dramatically over the same period. In New York, for example, cases have increased by more than 40%, driven by the highly contagious Omicron BA.2 subvariant and eased restrictions, said Anthony Fauci, White House chief medical adviser. Cases have increased by more than 70% in Washington, DC.

If more increases follow, “especially hospitalizations, we may have to go back to being more careful and having more uses of masks indoors,” Fauci said in an interview this week on ABC. .

Already on Monday, the city of Philadelphia announced it would reinstate an indoor mask mandate, affecting everything from schools to restaurants.

The latest variant has proven to be far less lethal than earlier strains of the virus – at least in part due to inoculation campaigns. Yet one-third of the US population is not fully vaccinated and therefore highly susceptible to diseases caused by the Omicron subvariant, according to the Centers for Disease Control and Prevention.

Where are oil prices going?

Meanwhile, the United States and Western allies have pledged to release 240 million barrels of oil from strategic reserves this year to offset the effects of sanctions against Russia. President Biden has pledged to release 1 million barrels per day from the United States’ Strategic Petroleum Reserve over the next six months, while other countries have collectively pledged to release 60 million barrels as part of of a plan overseen by the International Energy Agency (IEA).

“The release of the government’s strategic oil reserves should ease some market tensions over the coming months, reducing the need for higher oil prices to trigger near-term demand destruction,” Staunovo said. , strategist of UBS Group AG.

Swiss investment bank UBS lowered its June forecast for Brent by $10, although it still expects prices to hit $115/bbl this summer.

Other analysts also lowered expectations, but from high levels. Bank of America (BofA) kept its expectation for Brent at $102 on average over this year and next, but the company cut its peak summer price to $120 from $150.

“The release of strategic government oil stocks and continued Covid-19 lockdowns in China have altered the trajectory of oil prices,” the BofA team said.

The Paris-based IEA said releases from strategic stocks would cover much of Russia’s deficits for a few months – unless further cuts were made.

However, in addition to formal sanctions, the IEA estimated that due to a combination of pandemic impacts on consumption and growing international revolts against Moscow’s war in Ukraine, Russia may have to cut production by 3 million b/d due to a lack of buyers. . The EU is reportedly considering plans for a possible embargo on Russian oil if the war drags on.

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Against this backdrop, markets are watching closely for changes in US production and output from OPEC and its allies known as OPEC-plus.

U.S. production for the week ended April 1 hit 11.8 million bpd — a 2022 high — after holding steady at 11.6 million bpd for most of February and March. Production, however, remains at more than 1 million bpd below pre-pandemic highs.

American producers have been under pressure to increase crude supplies because of the war. Yet, in a context of runaway inflation, they were constrained by high labor and input costs. They are also under pressure from investors to divert spending from fossil fuels to green energy.

OPEC-plus, meanwhile, recently agreed to extend monthly production increases of around 400,000 bpd through May. That’s been the policy since last August, and it sets a measured pace that gradually undoes production cuts of nearly 10 million bpd made in April 2020 amid the pandemic.

OPEC’s bleaker outlook

OPEC researchers on Tuesday lowered their forecast for both global oil demand and production in 2022, citing weaker economic growth and the Russian-Ukrainian conflict. The cartel said consumption this year would increase by 3.7 million bpd to 100.5 million bpd, although that was about 500,000 bpd lower than its forecast last month.

The researchers said supplies outside of OPEC-plus would increase by 2.7 million barrels per day this year. The latest forecast is around 300,000 bpd lower than previous forecast. They said the war had reduced supplies as a result of the sanctions, but had also exacerbated inflation to such an extent that demand is falling in some parts of the world.

OPEC cut its forecast for global economic growth for the year to 3.9% from 4.2% in its previous assessment, citing energy-led inflation.

The outlook “also takes into account the impact of the conflict in Eastern Europe, as well as the ongoing effects of the pandemic, with downside-biased risks,” the cartel researchers said.

Sharp rise in inflation

The US Department of Labor said on Tuesday that the consumer price index rose in March at its fastest annual rate since December 1981 – 8.5%. That was up from 7.9% the previous month. Inflation has exceeded 6% for six consecutive months, the Federal Reserve’s target rate of 2%.

In March, the Fed raised interest rates to reduce spending and curb inflation. He signaled that several more rate hikes were likely this year.

The rate hike would solve inflation but also present a new risk of stunted economic growth, the OPEC researchers noted.

Holding the line on production may prove wise, given developments in China and inflation. However, if the EU were to ban Russian oil, the supply/demand dynamic could change significantly, according to Rystad Energy.

“It is estimated that up to 2 million b/d of additional Russian crude production could be lost if the EU bans Russian oil,” said Claudio Galimberti, senior vice president of analysis at Rystad.

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