What Awaits Oil Markets If Russian Oil Disappeared?

What Awaits Oil Markets If Russian Oil Disappeared?

2022-03-28 • Updated

A month after Russia invaded Ukraine, oil markets are still more volatile than ever, with little clarity on how the sanctions will affect Russian crude production as well as global oil demand. This opens the way for traders to ask two questions. Will the volatility continue? What is the next step for oil?

Market experts do not seem to agree on the path of oil prices, as major energy agencies have revealed significant differences in views on Russian oil production.

OPEC won't come to help

OPEC+ group led by Saudi Arabia and Russia may keep its production plans intact despite oil prices trading at their highest levels since 2008. When OPEC and its allies met on March 2, the Russian invasion of Ukraine had only started. The alliance stuck to raising production by 400,000 barrels per day each month since August to cancel cuts made when COVID-19 hit demand. 

Several major consuming countries, including the United States, have called on producers to increase production at a faster rate to help cool burning oil prices. But OPEC+ has so far resisted all calls for increased supplies. The next OPEC+ meeting is scheduled for March 31.

Russia is an essential part of OPEC+, so its participation is important. Of course, this is a major concern amid the war in Ukraine, along with sanctions. The disappearance of Russian oil from the market could push Brent crude futures to more than $200 a barrel. 

Nobody knows what's next for Russian oil

The International Energy Agency (IEA) warns that the world could soon lose three million barrels of Russian oil per day starting next month after some Western countries imposed harsh sanctions on Moscow, energy, and shipping companies.

The decline in Russian oil exports will affect geographical regions differently. For example, for the US, there is very little impact, as Russian crude imports represent only 2% of supply. Europe, however, is broadly dependent on Russian imports, most notably for natural gas. It will be difficult for the EU to switch quickly to other sources. 

The market needs 4 million barrels per day to rebalance

Rebalancing the oil markets will require about 2 million barrels per day of additional supply for the remainder of 2022, due to the current extremely low inventory levels. In addition, there will be the need for another 2 million barrels per day in Q2 to ease the disruption caused by the disappearance of Russian oil. If OPEC+ production continues at the current rate, Iran's oil exports don't increase and US production doesn't grow annually, together they will produce only 1.5 million barrels per day.

If Iranian oil returns to the market, this could provide an additional 1.2 million barrels per day in the second half of 2022, leaving a large gap that can only be filled by OPEC members with spare capacity, notably Saudi Arabia and the United Arab Emirates. 

It's expected that oil prices will witness volatility in the coming period, with a series of higher highs and lows before the OPEC meeting this week, with increasing indicators of strong demand and limited supply. Oil may try to test the record high ($147) if the organization shows little interest in responding to the Russian-Ukrainian war. The long-term outlook for oil remains bearish, but even the bears expect oil prices to continue rising this year.

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