The World Could See A Record-Breaking Oil Supply Shock

The World Could See A Record-Breaking Oil Supply Shock 1

Yves here. The headline should not come as any surprise. The West is determined to harm itself by harming Russia. As you know, the US has banned Russian oil. While Europe has not followed and the financial sanctions were designed to exempt commodities payments, there are de facto bans that go beyond the official ones, like “Russian” tankers not being allowed into ports (note that Russian-owned tankers are not flagged in Russia for insurance reasons over my pay grade, but they usually have Russian names so it’s not hard to pick them out, plus I assume port operators typically know who is who, ship-wise).

More important, the US and Europe have been whipped into such a Russia-hating frenzy that it seems impossible for them to back down on sanctions even when the war is completed. That means no (for the US) or less (for the EU) Russian oil. This is a problem because as we have explained, oil is not as fungible as you have been led to believe. Diesel and home heating oil require either medium heavy oil like Russia’s, or heavy sour like Iran’s and Venezuela’s. Shale oil and gas are very light and no substitute. Ditto the gas from Canada’s tar sands.

I was surprised to see oil prices drop below $100 this week, because the high oil prices are pretty certain to remain baked in. The only factor that could provide a breather over the next couple of months is if China’s Covid lockdown continues and expands to include more provinces. Factory shutdowns and greatly reduced travel in China would cut fuel demand near term. But that would produce additional supply chain issues in the West and price increases in some sectors.

Note that IEA forecasts provide for high energy prices denting economic activity, but not enough to offset the loss of Russian supply.

The assumption in the West is that they can break Russia’s economy. The wee problem is that the US has an economic glass jaw. Typical workers have suffered falling real incomes due to Covid-induced inflation, both supply chain shocks and the oil production whipsaw (producers not ramping up production as quickly as energy demand rebounded). Even if China manages to give the US a mini-breather on oil prices, it’s not hard to imagine that they will be over $6 a gallon in low income states, and over $7 in California by the summer. And it is entirely conceivable they will be over $7 all over the US by fall.

Even in the runup this month, we were already hearing of distress, like low wage US workers not being able to justify turning up after factoring in the higher commuting costs, and fishing fleets in Europe idling because the fuel costs were too high.

To put it more tersely: I don’t think the US economy or the Democrats can stand the prospect of $7 a gallon gas, and that now looks like an entirely plausible future. And I don’t see how Biden swallow crows to relax some of the energy sanctions so as to save his party’s hide.

For a contrast, we are embedding Putin’s recent speech of March 16 at the end of this post. Its latter half discusses economic conditions and relief plans. Of course Putin depicts everything as going reasonably well given the difficult givens, most importantly the claim that the banking system is running fine and consumer production is being prioritized.

Putin has some uncharacteristically sharp remarks about the Russian version of Davos men. I wonder if some private discussions failed?

I want to be as direct as possible: hostile geopolitical designs lie behind the hypocritical talk and recent actions by the so-called collective West…

Yes, of course, they will back the so-called fifth column, national traitors – those who make money here in our country but live over there, and “live” not in the geographical sense of the word but in their minds, in their servile mentality.

I do not in the least condemn those who have villas in Miami or the French Riviera, who cannot make do without foie gras, oysters or gender freedom as they call it. That is not the problem, not at all. The problem, again, is that many of these people are, essentially, over there in their minds and not here with our people and with Russia. In their opinion – in their opinion! – it is a sign of belonging to the superior caste, the superior race. People like this would sell their own mothers just to be allowed to sit on the entry bench of the superior caste. They want to be just like them and imitate them in everything. But they forget or just completely fail to see that even if this so-called superior caste needs them, it needs them as expendable raw material to inflict maximum damage on our people.

The collective West is trying to divide our society using, to its own advantage, combat losses and the socioeconomic consequences of the sanctions, and to provoke civil unrest in Russia and use its fifth column in an attempt to achieve this goal. As I mentioned earlier, their goal is to destroy Russia.

But any nation, and even more so the Russian people, will always be able to distinguish true patriots from scum and traitors and will simply spit them out like an insect in their mouth, spit them onto the pavement. I am convinced that a natural and necessary self-detoxification of society like this would strengthen our country, our solidarity and cohesion and our readiness to respond to any challenge.

The so-called collective West and its fifth column are accustomed to measuring everything and everyone by their own standards. They believe that everything is for sale and everything can be bought, and therefore they think we will break down and back off. But they do not know our history and our people well enough.

This sounds an awful lot like guillotine blades being sharpened, particularly because Putin is normally very measured. But this is a mirror image of the West’s “You are with us or are against us” posture applied to his own super rich.

However, if you read the balance of the speech, Putin lays out a lot of economic programs, which if they can be implemented quickly enough, would indeed blunt a lot of pain, particularly to lower-income cohorts. We’ll see soon enough. But if Putin can deliver well enough on this program, its ameliorating impact plus Russians seeing Ukraine as an existential fight has the potential to give them more staying power than the West. We’ll see in due course.

Back to the main event of oil price outlook.

By Tsvetana Paraskova, a writer for with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. Originally published at OilPrice

  • IEA: market could lose around 3 million bpd of supply from Russia starting in April.
  • Sanctions come at a time that OECD crude inventories were already well below their 5-year average.
  • OPEC producers have not been willing to fill the supply gap.
  • U.S. shale not expected to bring immediate relief to oil markets.

The global oil market could lose 3 million barrels per day (bpd) of supply from Russia starting in April, as sanctions on banks and buyers’ reluctance to purchase Russian oil could result in the biggest oil supply crisis in decades, the International Energy Agency (IEA) said in its Oil Market Reportfor this month.

Since Russia invaded Ukraine at the end of February, the United States has banned imports of Russian energy while the UK is working to phase out its Russian supply by the end of the year. Even though Europe has not sanctioned Russian oil and gas, a growing number of European buyers are joining the wave of condemnation of Russia’s war and pledge not to buy its oil. As of last week, as much as 66 percent of Russian seaborne spot cargoes were struggling to find a buyer, according to estimates from J.P. Morgan Global Research.

The Russian invasion of Ukraine came at a time when the oil market was already tightening, with inventories in OECD economies already drawn down to well below the five-year average and sitting at their lowest levels in eight years.

Immediate Offsets To Lost Russian Oil Unwilling To Help

The immediate solution that could help offset the loss of Russian oil supply lies in the two most influential members of OPEC, which, together with Russia, have been managing supply to the market in the form of the OPEC+ agreement for several years now.

However, OPEC’s Saudi Arabia and the United Arab Emirates (UAE) – the only two producers believed to have enough spare capacity to ramp up production in the short term – have not stepped forward to fill in the widening gap that buyers’ “self-sanctioning” of Russian oil is leaving. The UAE confused the oil market last week with somewhat contradictory messages that it backs additional increases in OPEC+, but energy minister Suhail al Mazrouei later reaffirmed that the UAE would stick to the plan of gradual production increases.

“The OPEC+ alliance agreed on 2 March to stick with a modest, scheduled output rise of 400 kb/d for April, insisting no supply shortage exists. Saudi Arabia and the UAE – the only producers with substantial spare capacity – are, so far, showing no willingness to tap into their reserves,” the IEA said in its report.

On the other hand, if the Saudis and the UAE were to tap into their reserves, the global spare capacity—largely in their hands—would be so thin that a turn for the worse in the Russian oil supply, or another outage in Libya, would leave global oil producers with such a small cushion that a price spike would be certain to follow.

U.S. Shale Can’t Pump Much More Immediately

So why isn’t U.S. shale pumping more, especially with the “blessing” of the White House and Secretary of Energy Jennifer Granholm, who urgedAmerican producers “to responsibly increase short-term supply where we can right now to stabilize the market and to minimize harm to American families.

Producers have said why for months: there is a time lag between drilling and first oil, also because of years of underinvestment, capital discipline, discouraging federal policies toward the oil industry, and supply chain bottlenecks.

For example, even if ConocoPhillips decided to pump more oil today, the first drop of new oil would come within eight to 12 months, CEO Ryan Lance told CNBC last week.

“Even if shale production responds to the price signal, it cannot grow by more than 1.4 mbd this year given labor and infrastructure constraints,” J.P. Morgan said this week.

Then there is the prospect of additional barrels from Iran, but they “could be months off,” the IEA said, adding that the Islamic Republic could ramp up exports by around 1 million bpd over a six-month period when—and if—a deal is reached.

Demand Hit

The gap between global oil supply and demand could be narrower than expected just a month ago, because runaway inflation, surging energy prices, tightening monetary policies to tame said inflation, and the sanctions on Russia are likely to “appreciably depress global economic growth,” the IEA says.

The agency cut its global oil demand forecast by 1.3 million bpd through the end of this year, which would result in 950,000 bpd slower growth for 2022 than anticipated in mid-February. Total demand is now seen at 99.7 million bpd in 2022, an increase of 2.1 million bpd from 2021, the IEA added.

Even if the expected demand growth slowdown materializes, it will not offset the loss of Russian supply, leaving the market in deficit if the shunning of Russian oil accelerates and continues throughout the year.

OPEC also warned of slowing economic and oil demand growth in its own market report earlier this week. OPEC said that Russia’s war in Ukraine and the spiraling inflation could impact oil consumption growth, which “remains under assessment.” The cartel left its outlook of global oil demand growth at 4.2 million bpd for 2022, “for the time being”, but flagged “the extremely high uncertainty surrounding global macroeconomic performance.”

“Looking ahead, challenges to the global economy – especially regarding the slowdown of economic growth, rising inflation and the ongoing geopolitical turmoil will impact oil demand in various regions,” OPEC said.

“Given the complexity of the situation, the speed of developments, and fluidity of the market, with so far limited data to understand the far-reaching consequences of this conflict, projections are changing almost on a daily basis, making it challenging to pin down numbers, with reasonable degree of certainty,” the cartel said.

The next monthly meeting of the OPEC+ group led by Saudi Arabia and Russia is on March 31, and the volatile and high oil prices will likely put further pressure on the OPEC members of the alliance to boost supply more to try to offset the losses from Russia.

00 Ukraine Putin Address socioeconomic support for regions 3-16

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