Oil market concerns shifting away from pandemic
Michael Rothman
For the better part of two years, oil market volatility had at its center concerns linked to the coronavirus pandemic and, more specifically, negative impacts on global oil demand growth from isolating and containment measures.
And 2020 saw the largest ever retrenchment in oil usage that eclipsed the previously worse contraction, which occurred in the aftermath of the global credit crisis.
Very much to its credit, Saudi Arabia corralled the rest of OPEC and a few key non-OPEC countries to rein in oil production and so avoid a cataclysmic build in oil inventories, which would have plagued oil prices for years.
This OPEC+ group achieved a related goal of working down inventories toward a level corresponding with the 2010 to 2014 average with the aim of lifting oil prices to budget-friendly levels.
That the Kingdom and its producer colleagues never received broad accolades for navigating the demand crisis is not the point. The point is that despite a literal horde of market watchers and pundits who knew the producers’ action would “fail miserably,” global oil inventories were drawn down 660 million barrels since July 2020, a draw that stands unparalleled in oil market history.
As pandemic effects go, a funny thing has happened since the sharp oil price sell-off after news of the omicron variant of COVID-19 surfaced in November: Market behavior has shifted from pandemic-centric issues to macro-economic concerns.
The interest-rate leanings expressed by major central banks has moved center stage and with that the broader concern about the global economic outlook. In the same vein, the Russia-Ukraine conflict has aggravated angst about the economic climate. The considered opinion, however, is that the oil market has postured defensively around the Ukraine crisis.
Russia is the world’s second-largest oil exporter after Saudi Arabia. It exports on average 7 million to 7.5 million barrels per day — this includes crude and refined oil products. As to natural gas, Russia ranks first in the world with outflows averaging 22 to 23 billion cubic feet per day. If the oil market was concerned about those volumes being disrupted or dislocated, the price of crude would have shot well above current levels. In fact, at the time of writing, Brent was trading below its current fair value by around $7 to $8 per barrel based on global inventory levels.
Should the Ukraine situation morph into a broader armed conflict, the odds of Russia’s oil (and natural gas) exports becoming embargoed seem close to zero. Its energy exports to the world are irreplaceable, literally.
There were similar prognostications about Russia’s oil and natural gas being sanctioned when it annexed Crimea and, similar to then, issues are likely to end up centered on broader economic ramifications.
The writer is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research
