Global economic challenges adding downward pressure on oil
Last week, crude prices settled mixed in volatile trade, as concerns about the global economic growth and oil demand were offset by EIA data showing an unexpected large draw in US crude oil stocks.
Investors weighed Germany’s announcement that it planned to stop importing oil from Russia by the end of the year. Meanwhile, a decline in the US dollar value from recent highs helped alleviate downward pressure on oil prices. On the other hand, the number of confirmed COVID-19 cases continues to rise globally.
The impact of the Russia-Ukraine conflict on the global economy and persistent inflation now raises the risk of a potential recession, knocking global gross domestic product off its post-pandemic recovery footing in 2022 and 2023. This, in turn, has forced the oil industry to revise its short-term demand forecast showing a slow pace of economic recovery but continued GDP growth.
In its April update, the IMF lowered its forecasts of global GDP growth for 2022 and 2023 to 3.6 percent for both years. The fund said the revisions were due to the latest COVID-19-related lockdowns in China, which is creating new bottlenecks in the global supply chain; rising inflation; and the Russian invasion of Ukraine. The IMF expects global output to remain below pre-pandemic trends until 2026, with permanent losses in emerging markets. Overall, the outlook for oil demand has declined since the beginning of the war in Ukraine.
High inflation levels will continue as industries and countries grapple with soaring energy prices, the fallout from Russia’s war with Ukraine, and continued COVID-19-related lockdowns in some key economies.
Russia’s crude oil production is falling fast. Oil companies, faced with an exit of traditional clients, eroding margins at refineries, and a shortage of storage for both crude and products, are correcting back at the wellhead. For the second quarter of 2022, crude output could drop to 8.7 million barrels per day from 10.04 million barrels per day in the first quarter.
The steep fall in crude production is not directly translating into significantly lower crude exports. However, since the domestic crude output is sliding more than collapsing refinery runs, less is available for exports. The drop in refinery runs will cut exports of refined products to well below prewar levels.
The ever-widening contango in Brent CFDs also points to a well-supplied oil market, despite as much as 550,000 barrels per day of Libyan crude supply outages due to blockades of oilfields and export terminals that started there last weekend.
Reports that the storm-damaged CPC single point mooring (SPM) buoys offshore the Russian port of Novorossiysk on the Black Sea could return to its capacity soon may have eased the tightness in European physical markets.
The market will face increased uncertainty over the next four weeks as the May 15 EU deadline approaches. Tighter sanctions will bring about more trade friction, which could see an additional 1 million barrels per day of Russian supply lost.
If it takes effect, the EU deadline offers a lot of upside pressure to prices in the immediate short term and could result in daily spikes back up to $130 per barrel again.
However, the underlying fundamentals for crude point to headwinds and the physical market with Brent CFDs in contango confirms this and therefore maintains that the overall direction for crude prices is down.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.