There have been several figures thrown around in the press about how much Russian oil supply has been taken out of the market since its invasion of Ukraine. While there is clear evidence that buyer hesitancy and recent US sanctions on imports have hit international movements of Russian petroleum, we have yet to come across reliable data to gauge the actual volume effect.

Reliable volume measurements notwithstanding, we have seen severe downward pressure on the price of Urals crude relative to its benchmark and we’ve seen a severe spike-up in the price of diesel fuel relative to global crude benchmarks — known as the diesel crack. The spike in diesel cracks has occurred in all key markets and likely stems from supply-side issues — as opposed to a demand surge. About one-fifth of Russia’s petroleum exports are for diesel fuel, and we suspect that those flows have been impacted by the same buyer avoidance seen for crude.

This past week witnessed a tangential effect related to Russia’s invasion, namely a statement from the Kremlin that crude flows on the Caspian Pipeline Consortium — a 1,500 km pipeline that transports oil mainly from Russia and Kazakhstan to the Black Sea — will be reduced for at least two months. The reason offered was “weather damage” to two of the three tanker loading facilities, and this is expected to cut flows to its Black Sea port by a million barrels per day. While some Russian crude is blended into that line’s throughput, the bulk of the disruption seems to hit Kazakhstani output.

But there’s a rub.

Those export berths are engineered to withstand severe weather conditions leaving us to question the reason given for the disruption. Frankly, Russia forcing the system offline would make the prospect of any additional sanctions on its petroleum exports more unpalatable. While this view may seem cynical, our experience covering the global energy markets over four decades lead us to this conclusion.

From a global oil balance perspective, any losses of the Organization of the Petroleum Exporting Countries or non-OPEC supply are problematic. We have been very up-front with our clients, and in our columns in the Arab press, about the state of oil supply and demand. More specifically, we have been forecasting that global oil inventories would see a drawdown this year on top of the all-time record draw last year.

We cannot stress enough that our view about a further tightening of the world’s petroleum balance stands sharply at odds with the consensus projection for the system to loosen and that inventories will build. You may recall that this was also the case in 2021 as most all market watchers were certain storage last year would swell.

We are in the ninth consecutive year of capital budgets for oil exploration and production being lower than the high 2014 watermark. There has already been $2.2 trillion of spending forfeited over this time which, we contend, will result in structural supply tightness.

Misplaced beliefs that shale crude would result in a permanent surplus in the global system have been supplanted by equally misplaced beliefs about the “death of oil demand.” That large oil-consuming countries are discussing yet another round of emergency stockpile releases speaks to flawed thinking about those pushing green energy policies and related anti-carbon lobbying. Dumping oil from emergency stockpiles will do little to counter the structural pressures that we have been forecasting.
Source: Arab News