ICIS VIEW: The oil market and the four horsemen

Sophie Udubasceanu


LONDON (ICIS)–The global crude oil market has been swamped in crisis after crisis over the last year. Russia’s unprovoked attack on Ukraine rode in as the fourth horseman, triggering a 14-year high for Brent futures as investors voiced fears of another war.

This invasion of a neighbouring country is not the first of its kind, but in this case, the oppressor has a lot of cards up his sleeve. Not only is Russia the second largest oil exporter of crude oil (not to mention gas), adding 5m bbl/day to global supplies, but it knows that the current market conditions are far from perfect. It has been a tight market with demand recovering from the first horseman to hit.

Coronavirus brought the world to a standstill, erasing years of demand growth. Negative WTI futures prices, despite caused by a momentary lack of liquidity, storage shortages and traders’ panic, paved way for a new price floor in this headline driven market.

A tight supply picture made up the second horseman, with an OPEC deal curbing production on purpose and unintentional curtailments in other countries including Libya, Kazakhstan and Venezuela. Iranian talks have stalled for so long, that progress in their nuclear deal is no longer priced as strongly in the market, for fear of it being jinxed. Venezuelan production has struggled to recover as the country deals with economic difficulties under the weight of US sanctions.

The third horseman stemmed from a largely erratic sentiment as the global energy crisis was taking hold with buying and selling highly sensitive to the latest headlines. In such volatile times, daily price swings upwards of $5/bbl are no longer as ground-breaking.

Russia’s military continued its operation over the weekend, at great cost with loss of life growing each day. But the country’s appeal to China for economic stability, showed a shred of vulnerability in the face of growing sanctions from western powers, especially as its economy is expected to shrink by 15% based on the most recent projections.

US and UK sanctions come in as a gesture more than expectations of an actual impact on Russia, which sends half of its exports into EU – a player that has specifically avoided targeting the energy sector. No doubt, the SWIFT sanctions here are more important, as the lack of financial backing for oil transactions will discourage companies to purchase any Russian oil.

In fact, Russia’s main export – Urals, a type of crude oil loading both in the Baltic Sea and the Black sea, has plummeted to new lows of $28.45/bbl below Dated BFOE+ , the wider European benchmark. With such attractive prices, both China and India have been tempted and 2m bbl of Urals were already heading to India mere days after troops opened fire in Ukraine. The US has warned Beijing against providing that clearly-needed lifeline to Russia.

A flurry of companies have so far highlighted intent to reduce reliance on Russian oil (and gas), but this is a long-term plan and will in no way help ease the misfortune of Ukrainians finding refuge in neighbouring countries this week.

In reality, no one country can plug the hole that Russia would leave in the market in the event of a global ban. Saudi’s spare capacity surpasses their February output of 10.1m bbl/day, but is nowhere near enough. EUA and Iran have promised to ramp up production, but have so far fallen short of that pledge, especially as nuclear talks with Iran have not yet come to fruition. US exports have been rising most of 2021, peaking in December to 3.45m bbl/day, when not threatened by hurricanes or power outages.

For Russia to lose its strongest chip, its oil supply, the world needs a combination of alternative sources in tandem.

Like most things, in life and war, it will take more than one to prevail.

Sophie Udubasceanu (Global Oil Editor)


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