A year of war in Ukraine and sanctions has deeply disrupted the oil market, which has become more fragmented and more uncertain, probably for a long time, with higher average prices in the future.
“The way the market works is radically different, in many ways, from what it was before the invasion of Ukraine,” said Jim Burkhard, head of oil research for S&P Global Commodity Insights.
Europe has, for the most part, weaned off Russian exports, which have been redirected to Asia, and replaced them with crude oil from further afield, mainly the Middle East and the United States.
Asia — China and India in particular — buys its cheap oil from a constrained Russia, while countries that have chosen to do without pay more for their black gold.
“We had a real, very competitive global market, which no longer exists today,” according to Jim Burkhard. “It is now split.”
“Between Russia, Venezuela and Iran, almost 20% of world oil is cut off from many markets, particularly the United States and Europe,” he said. “And now the price of oil depends on its (country of) origin, not on its quality.”
On average, oil has to travel more to get to the buyer, “at constant fleet”, recalled Torbjorn Tornqvist, president of the trader Gunvor Group, at the CERAWeek energy conference in Houston (Texas). Therefore, “maritime freight rates have therefore increased and remain high”.
“The market has changed and is not about to go back,” said Jose Fernandez, Under-Secretary of State for Energy, the highest official in American diplomacy on this issue.
“There is now a fundamental mistrust of Europe vis-à-vis Russian energy that will last a long time,” said Eirik Waerness, chief economist of the Norwegian state oil company Equinor.
During CERAWeek, Bader Al-Attar, director of the Kuwait Petroleum Corporation (KPC), indicated that the public conglomerate which exploits the oil resources of Kuwait had notably seen the opening of new outlets in Europe for its kerosene.
“Europe now buys diesel from the Middle East, India and China,” agrees Torbjorn Tornqvist.
– “Tense” Market –
Among producers, the disruptions related to the conflict in Ukraine have put the Organization of the Petroleum Exporting Countries (OPEC) even more at the center of the game.
“OPEC remains very important, in particular because it has excess capacity, mainly in Saudi Arabia and the United Arab Emirates”, underlines Jim Burkhard.
On the other hand, the OPEC + group, formed in 2016 with ten non-member countries, which became a crucial axis of the market before the war, “is no longer what it was” a year ago, according to the analyst.
Russia “can no longer be for Saudi Arabia”, leader of OPEC, “the partner it was before the war”, advances Jim Burkhard.
The United States is the other major player whose influence has been strengthened.
The world’s largest producer thus shattered its one-week crude export record last week, with 5.6 million barrels per day, almost double the daily average for 2021.
Despite this openness, US production remains significantly below its pre-pandemic level.
“Volumes continue to grow, but they could have increased even more”, considers Eirik Waerness.
He cites the desire of the American shale oil industry to clean up its finances and the shortage of equipment and personnel to explain this discrepancy.
To support prices, OPEC decided in early October to reduce its production by two million barrels per day.
As a result, the market is “tense”, describes Eirik Waerness. “Excess capacity, whether for oil or gas, is very low.”
“And we don’t know how long Russia will continue to produce 11 or 12 million barrels a day,” he said.
With the exit from the country, after the invasion, of all the foreign oil groups, “will Russia be able to replace these skills?” Asks the economist.
Added to this is the chronic under-investment in oil, which is widening due to the energy transition and threatening supply contraction.
In this post-invasion market of Ukraine, fragmented and under tension, “we will still have cycles” with significant price variations, downwards as well as upwards, warns Jim Burkhard. “But the center of gravity will be around $70 or $80 a barrel, which is higher than what we’ve seen in the last 20 or 30 years.”
This article is originally published on medias24.com