Oil shortage fears add to price volatility

Renewed worries about global supply shortages are pushing oil prices higher again, the latest sharp moves in three weeks of extraordinary market volatility since Vladimir Putin ordered Russian tanks in Ukraine.

The international oil benchmark, Brent crude, stood at $107.93 a barrel on Friday, up more than 9% over the previous two sessions. The price was well below the $139 peak reached on March 7, but still about $10 a barrel higher than before the Russian invasion.

Calculating the supply-side effect of punitive sanctions on Russia, the world’s largest exporter of crude and petroleum products, has been complicated by hopes of peace talks between Moscow and Kyiv and the possibility of easing restrictions imposed on oil exporters Venezuela and Iran. Lockdowns to contain a new surge of Covid-19 in China, the world’s biggest oil importer, will decrease some consumption.

“Oil price volatility goes hand in hand with wars involving major oil producers,” said Bill Farren-Price, director of Enverus, an energy consultancy.

“Supply risk is one thing, but demand doubts pull the other way. The next big milestones will be Europe’s approach to Russian energy sanctions and Iran’s nuclear talks, which could lead to a flood of Iranian oil. It’s a giant oil price swing.

Oil prices jumped after the International Energy Agency said on Thursday that Russian crude production could fall by 3 million barrels a day from April, or 3% of the world total. The agency, a watchdog for Western nations, warned that the world could be on the cusp of “the greatest [oil] supply crisis for decades”.

But price gains will be limited until traders can quantify the extent of Russian supply losses, other analysts said.

Russia’s oil production had actually increased so far in March, said Florian Thaler, chief executive of OilX, which tracks global oil flows. Sales of refined products began to decline, but crude oil exports remained robust, he said.

EU countries and others, including China, continue to buy Russian oil, despite the US ban. Thaler said India, which normally imports around 150,000 bpd of Russian crude, could increase that figure to more than 500,000 bpd in April.

Russian crude exports were now selling at prices well below Brent to entice buyers, Morgan Stanley analysts said, “and history suggests that when sufficiently discounted, crude tends to find a market. “.

Any loss of Russian production would squeeze a fragile market in which global oil supplies were already failing to keep pace with booming post-pandemic demand, analysts said.

On Thursday, Morgan Stanley raised its Brent price forecast for the third quarter by $20 a barrel to $120 a barrel. Goldman Sachs raised its forecast to $135 a barrel for the year, but said Brent could hit $175.

Commercial stocks of oil in rich countries were falling rapidly as supply fell short of demand, the IEA said this week. Western countries have also released oil from emergency reserves in a bid to cool oil prices which remain more than twice their long-term historical average.

Some analysts have said that a price spike caused by an emerging supply shock could destroy demand for oil, possibly driving prices down.

The Ukraine crisis alone could “significantly depress global economic growth”, the IEA said. It cut its forecast by about a third for how much crude the world would use in 2022.

OilX’s Thaler pointed to China, where he said refinery imports and demand are now well below 2021 levels.

By contrast, consumption in the United States, the world’s largest oil market, has remained near historic highs above 20 million barrels per day in recent weeks despite record high domestic oil prices.

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