On Tuesday, Russia cut off gas supplies to more European buyers: Stated-owned Gazprom halted pipeline shipments to the Netherlands and Denmark, as well as a contract with Germany after the buyer rejected Russia’s request for payment in rubles. Brent prices were also supported by Shanghai’s economic reopening, which begins officially today after a two-month lockdown for the city.

But while the immediate impact of the EU ban on oil prices should be relatively limited, we expect Brent crude to remain well-supported both in the near and medium-term.

The phased nature of the EU ban will reduce the immediate impact of the supply disruption… The ban to seaborne crude imports from Russia will come into force within six months, while for oil products, it will take effect in eight months. No timeframe has been given for how long pipeline imports will be exempted from the ban. But both Germany and Poland, which rely on pipeline imports, have already indicated they will cut their purchases to zero by year-end. In addition, we believe that Russian crude exports will be supported in the near term by demand from China and India for discounted Russian oil, further reducing the immediate impact on global supply demand imbalances.

… but will worsen longer-term structural imbalances in global oil supply. We expect the impact of the EU ban to be felt further down the road as the lack of Russian supply will add to global structural imbalances. OPEC+ members are already having trouble meeting their current increased production targets due to years of underinvestment. The recent US move to release its strategic oil reserves is only a short-term solution to supply shortfalls and creates demand for restocking down the road.

In the near term, oil prices will be supported by China reopening and the Northern Hemisphere holiday season. We believe the near-term direction of oil prices will be driven more by the reopening of the Chinese economy and summer travel activity in the Northern Hemisphere. Chinese oil demand has taken a hit this year as over 40 cities, including Shanghai and Beijing, have faced partial or full lockdowns. However, we expect the harshest of the restrictions in Shanghai to ease gradually from late June and for China’s economy to recover in 2H 2022, paving the way for a recovery in Chinese oil demand. Meanwhile, the International Energy Agency has warned fuel demand will rise when the main holiday season begins in the US and Europe. US gasoline prices have hit another record as the summer driving season starts, while the IEA said Europe could also face fuel shortages this summer due to tight markets.

So, we expect Brent crude prices to remain elevated over our forecast horizon. We forecast Brent crude to trade at USD 115/bbl through June 2023, higher than the current levels of USD 110.2, USD 104.5, USD 100 and USD 96.9 in the September 2022, December 2022, March 2023 and June 2023 futures contracts, respectively. We continue to advise risk-taking investors to add long positions in longer-dated oil contracts in Brent, or sell Brent’s downside price risks, and we maintain a global sector preference for energy equities.
Source: UBS