This is the result of self-sanctioning by Russian crude buyers in fear of future sanctions and/or for reputation reasons. With limited Russian storage capacity, these disruptions will likely, with a delay, also trigger production shut ins.

Before the war, Russia exported 4.7mbpd of crude and 2.8mbpd of oil products. Energy Intelligence estimates that about 1.5mbpd of crude and 1mbpd of oil products are impacted. Of note, only crude exports via tankers are disrupted, crude exported via pipeline (about 1.8mbpd) is not impacted.

Amid limited OPEC+ spare capacity, higher oil prices are needed. A price of USD 125/bbl would raise global oil spending to around 5% of GDP—a level at which we expect demand growth to slow and potentially trigger a supply response from US shale in 2H22. The exact price level at which demand growth starts to slow also depends on the USD (since most oil is consumed by countries with other currencies) and the energy subsidies. We consider USD 125/ bbl as a soft cap, should disruptions increase even further and/or last for an extended period this could require even higher prices. While a possible announcement of a new nuclear deal between Iran and major world powers over the coming days could trigger near term price volatility, we do not expect any such price setbacks to last considering the large Russian flow disruptions.

Upside scenario

Brent crude oil December 2022 target: USD 130–160/bbl

Upside risks to our forecasts come from several factors. Large and longer lasting disruption of Russian crude production and destabilizing political events in oil-producing regions such as Libya, Venezuela, Nigeria, and the Middle East could trigger a sharp drop in supply for a sustained period. A faster-than expected oil demand recovery as mobility picks up and a slow production response (i.e., increase) from the US and OPEC+ would also be supportive.

Downside scenario

Brent crude oil December 2022 target: USD 50–80/bbl

Downside risks include a sharp price increase over the coming months due to large disruptions in Russia, which triggers a recession. Another factor which would weigh on oil prices is a new pandemic that results in renewed extended mobility restrictions and weighs on the oil demand recovery. A hard landing of the Chinese economy in 2022 also poses a downside risk, as emerging Asia has been the engine of oil demand growth in recent years. Another concern is that capital discipline in the US starts to erode. The return of disrupted oil production in Venezuela and Iran could also weigh on prices.
Source: UBS Financial Services Inc.