A year after the Ukraine invasion, the oil market changed a lot

A year after Russia’s invasion of Ukraine, the oil market has become more fragmented and uncertain, a dynamic that is expected to boost crude prices in the long term.

Western governments’ condemnation of Russia has essentially cut Europe off from Russian supplies, making it more dependent on the Middle East and the United States.

That shift means cheaper Russian energy imports to China and India, while countries that refuse to buy Russian crude must pay a premium to import from other suppliers.

The oil market “is radically different in some ways than it was before the invasion of Ukraine,” said Jim Burkhard, head of research for oil markets, energy and mobility at S&P Global Commodity Insights.

A “true global market” with open competition “no longer exists,” said Burkhard, who calls the market’s current state “fragmented.”

With the addition of Russia to the list of sanctioned countries, along with crude oil exporters Iran and Venezuela, nearly 20 percent of global supply is cut off from major markets, including the United States.

“Oil is priced based on its origin, as opposed to its quality,” Burkhard said.

The balkanization of the market also affects the crude tanker routes. Europe’s ban on Russian oil is forcing Moscow’s exports to travel further to reach buyers.

“It means more miles to travel in the water,” Torbjorn Tornqvist, co-founder of Gunvor Group, a trading company, said at the CERAWeek energy conference in Houston. “Ship rates have been very high and have remained high.”

Since the invasion, “we’ve seen a fundamental shift that is unlikely to reverse any time soon,” said Jose Fernandez, undersecretary for economic growth, energy and environment at the State Department.

Many expect lasting changes.

“What I think will last a very long time is the fundamental mistrust and the fundamental decision not to depend on Russian energy for a very long time in Europe,” says Eirik Waerness, chief economist at Equinor. “It will have long-term consequences.”

The flux in the wake of the Russian invasion has also strengthened the position of the Organization of the Petroleum Exporting Countries.

Burkhard said Saudi Arabia’s spare capacity continues to give the exporter group exceptional leverage.

But the situation has changed significantly compared to the end of 2016, when the Vienna-based cartel began coordinating policies with Russia.

“Russia today cannot really control its production because it faces sanctions,” leading to production below Russia’s quota under the “OPEC+” policy, Burkhard said.

“OPEC is still very important, but OPEC+ right now is not what it was before the war,” he said.

The role of the United States in international markets has also been strengthened.

The world’s largest oil producer, the United States, last week set a new record for crude oil exports at 5.6 million barrels per day, almost double the level in 2021.

Still, US manufacturing has not returned to its pre-pandemic level. Key factors that have weighed on production include US shale producers’ strategy of using excess cash to strengthen balance sheets rather than increasing capital spending; and shortages of essential oilfield materials and personnel.

“Volumes continue to rise, but they probably could have risen even more,” Waerness said of the United States.

Globally, markets continue to feel the effects of OPEC’s decision in October to cut production by two million barrels per day.

“The fundamentals are relatively tight,” Waerness said. “The additional capacity to bring new supplies to the markets, whether we’re talking about gas or oil, is very low.”

Waerness said there are also questions about the sustainability of Russian production given the exodus of Western oilfield suppliers and service companies.

“We don’t know how long Russia can continue to produce 11 million barrels and 12 million barrels per day,” Waerness said. “Will they be able to replace that type of skills?”

The situation is further complicated by the focus on the energy transition, which experts believe is exacerbating underinvestment in conventional petroleum.

The result, according to Burkhard, is a higher baseline for crude oil prices.

“We will have cycles, but the center of gravity for oil prices we think will be around $70 or $80,” he said. “That’s higher than what we’ve typically seen over the last 20-30 years.”

© 2023 AFP

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