International oil prices rose on Wednesday, breaking through $90 per barrel, hitting a seven-year high as supply constraints and rising political tensions between Russia and Ukraine intensified market tensions! As of Wednesday’s close, WTI crude oil prices rose by US$1.75 to close at US$87.35 per barrel, an increase of 2.04%; Brent crude oil prices rose by US$1.76 to close at US$89.96 per barrel, an increase of 2%.
Recently, Russia and Ukraine have been insisting on their own opinions, and the situation has escalated. At the same time, the United States and Russia also disagreed with each other’s answers. The latest satellite images of the Russia-Ukraine border show that in a military camp near the southwestern Russian city of Voronezh, the number of heavy equipment such as tanks and artillery is still growing under a blanket of snow. On the popular overseas social media TikTok, there are constant videos showing Russian military trains loaded with missiles, military vehicles and soldiers continuing to move westward.
On the other hand, global oil market conditions appear to be tighter than expected, with the Omicron strain having little impact on demand but causing tight supply. Global market supply is shrinking this year, according to a monthly report from the International Energy Agency (IEA). The IEA has raised its global daily oil demand forecast by 200,000 barrels/day in both 2021 and 2022. Global oil demand will increase by 5.5 million barrels/day in 2021 and 3.3 million barrels/day in 2022.
01. Escalation of geopolitical situation
Tensions between Russia and Ukraine continue to escalate. Russian officials have stepped up accusations that Kiev authorities plan to retake the breakaway region by force, something Ukraine denies. On the other hand, Ukraine’s security service said on Wednesday it had discovered new evidence that Russia provided weapons, including landmines, mortars and explosives, to the separatists. At present, both sides insist on their own opinions and the situation is tense.
In addition, U.S. Secretary of State Blinken stated in Washington on the 26th local time that the United States rejected Russia’s relevant demands in a written response to Russia on security issues, but provided a path to resolve the Ukrainian issue through diplomatic means. According to the Russian Satellite News Agency, in response to the written reply from the United States, First Vice Chairman of the International Affairs Committee of the Russian Federation Council (Upper House of Parliament) Zabarov said that the U.S. response did not satisfy Russia and Russia cannot accept it.
Potential conflicts would have a major impact on energy commodities such as natural gas and oil. “The market is worried about how sanctions will affect Russian oil entering the market,” said Tortoise portfolio manager Rob Thummel. “With global oil markets in short supply, reduced Russian oil supply will temporarily push up oil prices.”
Rebecca Babin, senior energy trader at CIBC Private Wealth Management, said that “anyone who is not involved in this ‘energy’ rally may start to really feel the need to take a position,” which may continue to push the market higher.
Russia is one of the world’s largest oil exporters. Political tensions have added to concerns about already tense energy markets, with worries about supply disruptions due to geopolitical conflicts pushing prices higher. U.S. Secretary of State Antony Blinken said the United States will ensure global energy supplies are not disrupted if Russia takes action.
Paul Sheldon, chief geopolitical advisor and analyst at S&P Global Platts, said, “The market is worried that physical supply may be interrupted. The most likely scenario is that crude oil flows will continue, but the risk that cannot be ignored is that some Factors may affect the physical supply and demand balance.”
02. Tight supply
Goldman Sachs analysts predicted last week that oil prices would exceed $100 a barrel in the third quarter of this year — and could climb to $105 a barrel by the first quarter of next year. Goldman Sachs noted that despite the recent surge in cases caused by the Omicron variant, the oil market is running a “surprisingly large deficit” as demand returns to pre-pandemic levels.
According to the International Energy Agency, oil consumption this year is expected to increase from 96.2 million barrels per day in 2021 to 99.53 million barrels per day, basically returning to pre-epidemic levels. Some experts are more optimistic, predicting that world oil demand will reach record levels this year and maintain strong growth in the coming years.
As market demand rebounds, oil shortages may lead to supply and demand imbalances becoming the focus again. The European power crisis since the beginning of winter has also sounded the alarm to the world. As the world’s three most important supply sources, there are still many uncertainties.
Claudio Galimberti, senior vice president of analysis at Rystad Energy, an energy consulting firm, said that “the only organization that can change the price trend now is OPEC.” However, judging from the recently released OPEC monthly meeting statistics, last year In November, OPEC and non-OPEC oil-producing countries complied with the 117% production reduction requirement, which means that the actual production capacity is insufficient and even below the monthly production quota. At the same time, the IEA report pointed out that OPEC+ only achieved 60% of its production increase plan in December last year and failed to achieve its production target of 790,000 barrels per day. It is reported that OPEC+ will hold a meeting on February 2 to consider increasing production again.
According to the U.S. Energy(EIA) reports that OPEC’s spare production capacity may only be 5.11 million barrels per day by the end of 2022, and this number may further fall below 4 million barrels per day by the end of 2023, which is down from 900 million barrels per day in the first quarter of 2021. Thousand barrels/day decreased significantly.
As for the United States, another major source of supply, well-known oil expert Daniel Yergin believes that U.S. crude oil production may increase by nearly 1 million barrels this year. Shale oil production is recovering, but it will be difficult to return to previous highs. Currently, U.S. crude oil production is about 2 million barrels lower than the record level of 13 million barrels per day in early 2020, while crude oil inventories have also fallen by nearly 70 million barrels during the same period. In addition, data show that capital expenditures of the 27 major U.S. oil producers fell to US$111 billion last year, a decrease of nearly 60%. Capital spending is expected to reach about $135 billion in 2023, less than half of 2014 levels.
The third is Russia. According to Rosneft data, Russia’s total crude oil production in 2021 will be approximately 10.9 million barrels per day, which is very close to crude oil production capacity, and there is basically no room to increase production. Russian Oil Minister Novak stated that he will strive to increase Russian crude oil production to 11.33 million barrels per day by May 2022. Even so, it is difficult to change the downward trend.
In addition, oil-producing countries such as Canada, Norway, Guyana and Brazil may try to bridge the gap between supply and demand, but to little effect. On Tuesday, a key oil pipeline from Iraq to Turkey was suspended due to an explosion, adding more pressure to an already tight oil market and further pushing up oil prices. It’s a reminder that spare capacity is critical to maintaining a stable supply of oil.
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