Less than a month from now, an embargo on seaborne Russian crude oil exports to the European Union will come into effect. As a result, global oil supply is set to tighten considerably as Russia is the biggest oil and fuels exporter in the world. And the market is preparing.
Hedge funds once again like oil, and are buying it on the futures market in considerable volumes, according to Reuters’ John Kemp. Last week, the buying reached 22 million barrels of Brent crude and 15 million barrels of West Texas Intermediate.
India is buying Russian crude at a discount, so it is buying a lot: its share of Middle Eastern oil imports fell to the lowest in 19 months in September, according to new data. Russia overtook Saudi Arabia as India’s number-two supplier after Iraq.
China is also buying Russian oil and not giving any indications it’s going to stop when the embargo enters into effect. The same is true of the G7 price cap for Russian crude that should also be coming into effect in a few weeks. China has already stated this will not change its current oil-buying habits.
Yet, with an EU embargo and a G7 price cap, what will almost certainly happen by the end of the year is that oil will become more expensive than it is now. Perhaps more worryingly, fuels - especially diesel - will become more expensive as the supply of crude oil tightens further while no new refineries are on the horizon.
The fuel situation is going to become a lot more complicated in February, too, when the EU’s Russian fuels embargo comes into effect. Currently, the European Union is importing some 400,000 barrels daily of Russian diesel, according to a Wall Street Journal report, as well as 1.7 million barrels daily of diesel from other suppliers. This 400,000 bpd will need to be replaced come February 5. And it will fuel higher inflation.
“Europe’s going to pay whatever these producers ask, and it’s going to be very, very high,” Benedict George, head of diesel pricing at Argus Media, told the WSJ. “If something unexpected happens, the price will go very high, very quickly because no one has anything to fall back on.”
Indeed, distillate stocks are below historic averages across regions, notably in the United States, which is also a major exporter of oil products to the European Union. This means prices will remain elevated because the only new refining capacity is in the Middle East and China, and it is limited. Demand for diesel fuel, on the other hand, is consistently strong because the fuel is used across the world for freight transport.
According to one oil analyst from S&P Global, who spoke to the WSJ, Europe could import more fuels from the U.S. and China, and reduce exports to South America and Africa. This would help it cope, of course, but it will cause a ripple effect on two different continents.
There is also the OPEC+ production cut to consider when looking ahead to the next couple of months in oil. Some expect that the anti-Russian oil embargo will lead to a decline of about 1 million bpd in global supply. OPEC+ is cutting another 1 million bpd from its collective production. That’s 2 million bpd in lower oil supply at a time when production growth in the U.S. shale patch is also slowing down.
In this context, institutional traders will likely keep buying crude, whatever the outlook for China’s Covid policies that have served as a major deterrent to oil prices this year. Oil supply is about to tighten, and if the G7 manages to put its price cap into effect and Russia stops selling oil to buyers complying with it, supply will tighten a lot. And life will become even more expensive.
By Irina Slav for Oilprice.com