WHILE crude oil markets have been mostly steady of late amid conflicting signals over China’s demand requirements and geopolitical supply risks, the impending ban on Russian seaborne crude imports has the potential to reignite volatility.
The G7 and the EU are finalizing details of a price cap that is intended to be implemented with the EU ban on seaborne Russian crude imports Dec. 5 and Russian oil products Feb. 5, 2023, which would prohibit insurers and insurance brokers in EU and G7 countries from providing services to oil buyers in other countries purchasing Russian oil above a specified price level.
These compliant countries have around a 90% share of the services worldwide.
An ongoing military escalation of the Russia-Ukraine war continues to risk tighter US and European sanctions, including the possibility of secondary sanctions.
“By early 2023, we will see less Russian export of crude oil and refined products of some 1 million b/d combined, leading to a reduction of Russian oil supply by 1.5 million b/d from pre-war levels,” said Kang Wu, head of global demand and Asia Analytics at S&P Global, with the shortfall to be countered by supply increases elsewhere and moderated demand growth.
Russia is the second-largest crude supplier to China, supplying 1.74 million b/d over the first ten months of 2022 to account for about 17.4% of the top Asian consumer’s crude imports, China’s customs data showed.
On the demand side, some view China as a wild card, with its oil demand growth offering the possibility of huge swings and a lot hinging on how well the reopening of its economy and easing of pandemic-related curbs goes.
Earlier this month, China reduced it quarantine requirement time for international travelers by two days, while still adhering to its zero-COVID policy.
“We expect China’s demand oil demand to rebound by 520,000 b/d in 2023 after a decline of over 300,000 b/d this year. As a result, global demand is forecast to grow by 2 million b/d in 2023, reaching 102.5 million b/d,” Wu noted.
A real demand recovery will most likely happen in March, after Lunar New Year celebrations are over and political reshuffling at the National People’s Congress is completed, some sources said.
Meanwhile, India’s unwavering appetite for Russian crude lifted its October inflows to multiyear highs.
From a market share of less than 1% in India’s import basket before the start of the Russia-Ukraine conflict, Russia’s share of India’s imports rose to 4.24 million mt, or nearly 1 million b/d, in October, taking a 21% share, comparable to that of Iraq and higher than Saudi Arabia’s share of around 15%, S&P Global data showed.
Over January-October, India’s demand for oil products rose 8.8% to 180.75 million mt, or 4.7 million b/d, according to the country’s Petroleum Planning and Analysis Cell data, reflecting improved economic activity after quelling a third wave of COVID-19.
However, future purchases of Russian crudes by Indian refiners will depend on how the EU ban impacts seaborne trade.
Oil prices restrained on supply
Oil prices will likely stay restrained as inventories are expected to build through April even with recent announced OPEC cuts, sanctions on Russia, and tapering releases from strategic petroleum reserves. But later in 2023, stocks should fall and prices increase, S&P Global said.
“Dated Brent prices are expected to average in the lower $90s/b for the rest of the year then dip below $90/b in Q1 before recovering for H2 2023,” it said.
Global oil supply is forecast to grow by 4.6 million b/d in 2022 and 1.7 million b/d in 2023, S&P Global said, adding that ‘we now see OPEC+ rolling over current quotas at their next Dec. 4 meeting and not cutting again until H2 2023”.
OPEC+’s announced 2 billion headline quota reduction at its Oct. 5 meeting amounts to an 800,000 b/d cut to actual supply, sending a clear signal that Saudi Arabia and the group are willing to stabilize and support oil markets, S&P Global said.
A pronounced US response against the OPEC+ cuts will make further cuts in the near term increasingly tough, while growing US-Saudi tensions add to the uncertainty of potential responses from the US in the form of SPR or other policy action.
The odds of an Iran nuclear deal remain thin, but after the outcome of the US midterm elections recently, there could be a revival of this deal, releasing more supplies to the market.
Then there are other bearish signals such as the rising risk of a global recession as central banks worldwide hike interest rates to tackle inflation, and companies start cutting jobs or decelerate hiring to prepare for the economic slowdown.
OPEC on Nov. 14 lowered its global oil demand forecasts for 2022 and 2023 for the second consecutive month following the decision by the producer group and allies to slash their output quotas starting this month.
Global oil demand will increase by 2.24 million b/d in 2023, lower than its previous estimate of 2.34 million b/d, the group said in its monthly oil market report. World oil demand in 2022 will grow by 2.55 million b/d, down from the previous estimate of 2.64 million b/d, it said.
All eyes are now on whether the ban on Russian crude and oil products, as well as further potential restrictions on the country, spur price volatility after a period of temporary calm.
Surabhi Sahu, Senior Editor, S&P Global Commodity Insights.