Oil prices are at loggerheads with harsh economic realities
Last week, oil prices continued fluctuating in the range of $100113 a barrel. During the week, there was news that moved prices up and down without changing the market’s mediumterm outlook. On Thursday, when writing this piece, oil prices rose modestly after a strong rally on Wednesday, with Brent crude trading at $107.88 a barrel and West Texas Intermediate prices at $106.13 a barrel. The growing fears of the onset of a cooling global economy amid high inflation have been offset by supply concerns due to geopolitical tensions in Eastern Europe.
Oil prices are still under pressure due to weak financial markets over rising interest rates, a strong US dollar, concerns over inflation and possible recession and prolonged COVID-19 lockdowns in China, the world’s largest importer of crude oil. All these factors weaken demand growth and limit the rise of oil prices.
In its monthly oil market report released on Thursday, OPEC lowered its forecast for global oil demand growth in 2022 for a second straight month by 300,000 barrels per day to 100.2 million bpd. It cited the impact of the Ukraine crisis, rising inflation and the resurgence of the Omicron coronavirus variant in China as the main contributors.
OPEC has slashed almost 800,000 bpd from its demand-growth forecasts since the crisis in Ukraine broke out.
Also, on Thursday, the IEA published its monthly report, in which it also revised down its global oil demand estimates for 2022 by around 100,000 bpd to 99.4 million bpd.
The agency also attributed the downtrend to escalating lockdowns across China while envisaging increasing prices for the rest of the year as the Ukraine crisis shows little sign of easing.
Meanwhile, the EU is still agreeing on a comprehensive oil embargo against Russia. The bloc hopes Europe will stop importing Russian oil by the end of the year, but concerns remain. European oil traders intend to reduce activities with Russia when tighter EU rules on Russian oil sales come into effect on May 15.
Avoiding Russian oil in the EU opens the door to supplies from other producers.
But OPEC Secretary-General Mohammed Barkindo warned the EU last month. He said: “We could potentially see the loss of more than 7 million bpd of Russian oil and other liquids exports, resulting from current and future sanctions or other voluntary actions. It would be nearly impossible to replace a loss in volumes of this magnitude.”
In this respect, the Saudi Energy Minister, Prince Abdulaziz bin Salman, said at a conference in Abu Dhabi last week: “The world needs to wake up to an existing reality. The world is running out of energy capacity at all levels.”
He added: “Not enough investment in global refining capacity is one of the key drivers of the global rally in gasoline, diesel, and jet fuel prices.”
At the same conference, the UAE’s Energy Minister Suhail Al-Mazrouei said that OPEC+ might not be able to guarantee enough supply when the world fully recovers from the COVID-19 crash in demand. He warned that the extreme volatility in the oil market in recent weeks results from some buyers boycotting certain crudes; it is not connected with OPEC+ and is outside the alliance’s control.
But, it seems that these warnings from
OPEC did not make any impression on the decision-makers in Brussels, who are moving full steam ahead with the oil embargo at a time when alternative suppliers are struggling to fill the void left by Russian oil.
Dr. Namat Al-Soof is an Iraqi oil
expert with long experience in upstream and market analysis. He held senior analyst positions
at OPEC, IEF in Riyadh, and OPEC FUND for International
Development.