- Despite some recent volatility sparked by China’s COVID lockdowns, oil prices may have found a bottom.
- Russia shed half a million barrels daily in March and an estimated 1 million barrels daily in April under the weight of the Western sanctions.
- The lost oil supply could worsen in the coming weeks, and many analysts are predicting that much of Russia’s lost supply may never come back online.
Oil prices seem to be getting cemented above $100 despite the latest fluctuations prompted by Covid-related lockdowns in China that have spurred uncertainty about demand. This downside risk has been offset by the pending embargo on Russian oil that the European Union is discussing. The embargo would see more than 3 million barrels daily in crude oil and fuels taken off the market later this year, with few alternative sources of supply on such a scale.
Another factor keeping prices where they are is OPEC+, which has refused to try and compensate for lost Russian barrels. In all fairness, it is not a deliberate decision for all members of the cartel: most OPEC members are struggling with other issues that prevent them from boosting production considerably, such as political unrest—in Libya—and technical issues—in Nigeria.
As a result, the market is settling into the new normal. According to Reuters’ John Kemp, hedge funds have slowed down their buying and selling activity in oil and fuels, with just 7 million barrels bought across the six most traded contracts in the first week of May.
Prices, meanwhile, started the week with a drop because of the lockdowns in China, after the Shanghai authorities tightened the lockdown measures they imposed on the city’s population a month ago in pursuit of the country’s net-zero policy.
Covid-related restrictions have been implemented across more than a dozen large cities in China, including the capital Beijing. In addition to sparking worry about demand for oil, the lockdowns are contributing to the deterioration of global supply chains that started during the first year of the pandemic.
“The COVID lockdowns in China are negatively impacting the oil market, which is selling off in conjunction with equities,” Andrew Lipow from Lipow Oil Associated told Reuters on Monday.
On the other hand, “The EU oil embargo will trigger a seismic shift in the European and global crude markets, which Rystad Energy expects could see as much as 3.0 million bpd (barrels per day) of EU crude imports from Russia cut by December 2022 in a full-fledged implementation of the policy,” the head of oil market research for Rystad Energy, Bjørnar Tonhaugen, told Reuters.
Meanwhile, however, Russian oil production is on the rise, according to Deputy Prime Minister and top OPEC+ representative Alexander Novak.
“Looking at the figures of early May, they are better than in April. The situation is stable, the output increased in comparison to April. We are counting on partial recovery of data in May and that it will be better,” Novak told TASS, without quantifying the increased production figures.
Russia shed half a million barrels daily in March and an estimated 1 million barrels daily in April under the weight of the Western sanctions. Analysts have expressed worry that some—or even all—of that production may not be coming back.
It does appear, then, that the initial shock that rattled oil markets following Russia’s invasion of Ukraine and the response of the West has begun to subside, judging by the behavior of hedge funds and the latest oil price movements in the context of otherwise strong headwinds such as the situation in China.
What this suggests is that benchmarks are likely to remain above $100 for the foreseeable future, bar any temporary fluctuations such as the short-lived drop of WTI below $100 after the White House announced the biggest release of oil from the SPR in history in a bid to tackle high oil prices.
The EU, meanwhile, is struggling to pass the oil embargo against Russia because Hungary and Slovakia are demanding more concessions in addition to the extended wind-down period that gives them more than a year to wind down Russian oil purchases. Bulgaria has added pressure on Brussels, saying it would veto any embargo if it is not added to the list of members exempted from it for the time being.