Oil market remains bullish amid fears of supply disruption

Oil market remains bullish amid fears of supply disruption

Oil market remains bullish amid fears of supply disruption
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Oil prices are approaching the $100 per barrel mark due to fears of supply disruption as the Russia-Ukraine crisis continues. 

The conclusion of Russia’s military drill near Ukraine’s border eased the tension pushing back Brent prices but the situation remains uncertain. 

The specter of a Russian invasion of Ukraine and the possible sanctions on Moscow are pushing crude prices up. Sanctions on Russia could affect the country’s daily export of around 5 million barrels to the global oil market, especially to Europe, and might also hamper gas exports to its European neighbors. 

The market seems to be in a panic mode as it would be difficult to make up for the missing Russian barrels in the case of sanctions. In addition to that falling spare capacity among oil producers, including OPEC +, is also a cause of concern. The US shale oil output also remains within or below industry expectations. 

This is the supply scenario. On the other hand, the global oil demand continues to rise more than expectations, as the world is bouncing back from the impacts of the coronavirus disease pandemic.

Inventories level continues to remain low for members of the Organization for Economic Co-operation and Development compared with the average five years 2015-2019. 

The OECD commercial oil stocks fell by 60 million barrels in December 2021, boosting market sentiment. At its peak, the backwardation in the futures market was so steep that the Brent M1-M2 spread surpassed $2 per barrel. Investors’ concerns were reflected in the steepening backwardation structure of oil futures forward curves. 

Meanwhile, strong crude demand in the physical market also lent support. Finally, concerns in the market that some producers may continue to have difficulty in meeting higher production levels due to various reasons technical and/or political unrest.

Chinese oil demand is likely to strengthen as economic activity picks up after the Lunar New Year holidays. Concurrently, refinery runs are to pick up amid strong refining margins, dwindling product stocks, and as China looks to mitigate the risk of a supply shortage, even as product export quotas remain limited. This should cause crude buying to accelerate, particularly in a comparatively low-stock environment. 

However, there are factors that if come into play, prices will likely fall back to levels leaving the war or geopolitical premium and markets will ease as surplus comes back into the markets. 

The global oil market may return to normality if the Ukraine crisis is resolved peacefully, non-OPEC production and US shale output become higher than expectations.

In addition to that, the return of Iranian oil will also ensure at least 1.5 million barrels per day in the market.

It is worth mentioning that inflationary pressures and high debts impact economic and oil demand growth negatively. These would end up with a surplus again in the market putting pressure on prices, especially as oil demand is expected to weaken due to refining maintenance in the second quarter of 2022.

Considering the uncertainty in the oil market, it becomes all the more important for the OPEC+ to adhere to its strategy of production hike by 400,000 barrels per day for April 2022 to ensure a semblance of normality in the oil market.

• Mohammed Al-Shatti is a Kuwaiti oil analyst.

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point of view