It rose sharply by US$41/barrel in five days, and fell back to a single-day high of US$26/barrel. In just nine trading days since March, the international crude oil price has fluctuated by 41.6%, which is very rare in history. Commodities such as natural gas and nickel also performed extremely well. Such a market is difficult for most investors to deal with. After experiencing huge fluctuations during this period, we see that funds continue to withdraw from the commodity market. Reduce positions and stay on the sidelines.
The direct cause of such extreme performance of commodities is the conflict between Russia and Ukraine and the severe sanctions imposed on Russia by the four countries. Such market conditions have made it difficult for traders to resist, forcing more and more investors to wait and see, bringing a lack of liquidity to the market, and the sharp fluctuations in prices have also brought huge challenges to real enterprises. The oil price that quickly shot up to US$130/barrel severely squeezed refining profits, forcing domestic local refineries to start reducing production or even suspending production for maintenance. However, the oil price soon fell back to around US$100/barrel, causing refinery profits to turn around again. But overall, risks outweigh opportunities, making business decisions in real industries more difficult.
Sanctions against Russia have led to drastic changes on the supply side. As a result, cross-regional price differences represented by EFS spreads, spot premiums and discounts, and monthly differences in the futures market have all shown extreme performances that are rarely seen in history. If Russia’s exports of about 7 million barrels/barrel of crude oil and products are completely banned, no one in the world will have the ability to make up for the resulting gap.
On March 7, the United States and the United Kingdom respectively announced a ban on the import of Russian energy, which once triggered a severe panic in the market. Oil prices surged sharply. So far, the market is still difficult to draw a conclusion on this. Although the EU plans to reduce its dependence on Russian energy as much as possible, In fact, many continental European countries cannot live without Russian energy in the short term. Although Russian crude oil has forced many buyers to wait and see due to sanctions and other risks during this period, the market is also very wary of a possible turnaround in this process, so we have seen recent oil prices surge rapidly and then retreat sharply.
Such performance means that sanctions against Russia have intensified supply-side tensions, but it is difficult to make a definite judgment on the relevant impact. The market will continue to follow the changes in the situation to assess the extent of the impact. All of this will take time to give an answer.
How ultimately will Russian crude oil exports be affected?
Russia said its oil production in March was 11.1 million barrels per day. From the current market perspective, considering the risks of sanctions and conflicts, some buyers have temporarily adopted a wait-and-see attitude towards Russian oil. Russian oil exports fell by 3 million barrels per day. Around 20 days have passed since it sent troops to Ukraine on February 24. Does Russia have enough storage space for the crude oil that it cannot sell? If this situation continues, Russia will most likely be forced to cut production.
At present, the United States and the United Kingdom have announced their decision to stop importing Russian oil, which will affect Russian oil exports, including crude oil and refined oil, totaling about 800,000 barrels per day. This sanction has been imposed, and the situation in Russia and Ukraine is not expected to change. It will ease significantly soon, which will have a substantial impact on Russian oil exports.
The European Commission proposed a plan called REPowerEU on March 8 to gradually wean itself off dependence on Russian fossil fuels by 2030. Half of Russia’s 7.8 million barrels/day oil exports will be exported to Europe. At present, it seems that the EU will most likely reduce its dependence on Russian energy as much as possible, but the cycle is very long. Most European countries, including Germany, do not There is no requirement to stop importing Russian energy. Therefore, German Foreign Minister Berberk stated on March 8, local time, that Germany relies on Russian energy and will not follow the United States and the United Kingdom in banning oil imports from Russia.
As the world’s largest and third largest crude oil importers, China and India have a very close energy cooperation relationship with Russia. Western sanctions will most likely cause Russia to increase its oil output to China and India, the two largest energy consumers. There is no doubt that China and India will also increase imports. At present, it seems that the United States and other Western countries will exert pressure. Recently, there is news that the United States hopes that China can reduce its import of Russian energy.
Generally speaking, the current damage to Russia’s energy exports has been determined, but since Russia is the world’s largest oil exporter, how much oil exports totaling 7.8 million barrels per day will eventually be restricted still needs to be continuously monitored. At present, the United States and its allies are continuing to increase sanctions against Russia. Over the weekend, the United States and the Group of Seven issued a new round of sanctions against Russia. Biden said that the United States aims to end normal trade relations with Russia, while Russian President Vladimir Putin He emphasized that the United States has launched an “economic war” against it and believes that the West’s sanctions policy against Russia will continue for a long time, but sanctions will only make Russia stronger than in the past.
Iran and Venezuela benefit?
Data shows that OPEC+ increased production by a total of 560,000 barrels per day in February, the largest increase since July 2021. Among them, nearly 40% of the increase in production came from Iran, Libya and Venezuela. Obviously, in order to cope with the tight supply situation caused by Russia’s energy shortage, the market is eager to increase the supply of crude oil.Lifting sanctions on Iran and Venezuela has become a natural option. Recently, there are increasing signs that the United States plans to lift sanctions on Iran and Venezuela. The current market consensus on the increase in Iranian crude oil supply is between 1 million and 1.3 million barrels per day, while Venezuela’s ability to increase production will be weaker, but if sanctions are lifted, it is expected that there will be room for growth of 500,000 to 1 million barrels per day. In this way, the return of Iranian and Venezuelan crude oil can probably provide the market with a supply of about 2 million barrels per day.
However, when Venezuela was under sanctions, Russia provided some support to Venezuela. Therefore, when the United States hoped that Venezuela would increase its crude oil supply to the United States, Venezuela expressed the hope that the move would not affect its relations with Russia and emphasized that if the United States wanted to increase its oil supply To reach an agreement, an “ambitious proposal” should be made to Venezuela.
The negotiations on the Iran nuclear deal have become uncertain again. The Vienna talks were suspended on March 11, local time. Iran explained that this was to resolve remaining differences and to prepare for the parties to return to talks for the last time. Khatibzadeh said that successfully concluding the negotiations is the main focus of all parties involved in the negotiations, and “no external factors will affect Iran’s common aspiration to seek a collective agreement.” However, some subsequent market information showed that Russia has become a new obstacle to whether the Iran nuclear agreement can be reached. The European side has stated that if Russia resolutely blocks the agreement, it will need to consider other options for the Iran nuclear agreement and will not negotiate with Russia on broad exemptions beyond the Iran nuclear agreement. Reaching the Iran nuclear agreement is crucial and refuses to set up Set deadline.
Will U.S. shale oil production speed up?
The unexpected decrease in U.S. crude oil drilling rigs in the previous week has cast doubt on shale oil, which has yet to make efforts to increase production. Does U.S. shale oil still have the potential to increase production? The latest data released by Baker Hughes shows that in the week ended March 11, the number of crude oil and natural gas drilling rigs in the United States increased by 13 to 663. Among them, the number of oil drilling rigs increased sharply by 8 again, marking the ninth increase in the past ten weeks. . This shows that high oil prices have obvious incentives for producers to invest additionally. The tight supply situation in the crude oil market continues. Considering high inflation, oil prices are likely to remain high, which makes the profits from shale oil production very attractive. The EIA further increased U.S. crude oil production in its March energy outlook.
In addition, high oil prices may also encourage other crude oil producing countries to increase output. For example, Brazil and Guyana still have the potential to increase production. However, if sanctions against Russia continue, the global crude oil market supply and demand will face great variables. EIA’s latest supply and demand balance outlook has changed drastically for three consecutive months, which also shows the highly unstable nature of the crude oil market. EIA has lowered its forecast for a crude oil market surplus in 2022, which has been significantly reduced by nearly 400,000 barrels per day from the previous period. This adjustment is large, and the negative impact of high oil prices and the Russian-Ukrainian conflict on the global economy has also lowered its recovery expectations for crude oil market demand in 2022. However, in comparison, sanctions have greater restrictions on Russian energy exports. . What is relatively certain is that the current crude oil market supply is still tight, and the crude oil market throughout the year is still full of variables.
On March 10, the United States announced the February CPI data that the market is paying attention to. The annual rate of the U.S. CPI in February without seasonally adjustment was actually announced at 7.90%. The data performed in line with expectations and continued to hit a 40-year high.
Violent fluctuations in oil prices will trigger a series of chain reactions, and the fragility of the supply side may have some far-reaching impacts. In addition to affecting the energy market structure, it may also accelerate the energy transformation process. This is specifically reflected in the large-scale departure of speculative funds from the futures market. . Data from the U.S. Commodity Futures Trading Commission (CFTC) shows that in the week of March 8, the net long position of NYMEX WTI crude oil held by speculators fell by 3,256 lots to 277,534 lots. Speculators’ net long positions in Brent and WTI crude oil fell by 89,493 lots to 442,087 lots, a new low in the last 11 weeks. Intercontinental Exchange (ICE) data shows that in the week of March 8, the net long position of Brent crude oil held by speculators fell by 97,122 lots to 157,672 lots, a new weekly low. The net long position in Brent crude oil held by speculators fell by 30,829 lots to 96,252 lots. Obviously, the high degree of uncertainty in the crude oil market has made speculative funds choose to stay on the sidelines.
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