The recent EU deal on a Russian oil embargo has put upward pressure and volatility again, with Brent prices hovering well above USD120 last week. Trust Economics (https://trusteconomics.eu) estimates that developments in the oil market are expected to hit growth. The geopolitical risk and the EU agreement will keep oil prices high during the summer and above USD115 per barrel throughout 2022, while in 2023 it will fall to $90-95 per barrel (given that Iran and Saudi Arabia achieve to meet the Western (mainly EU) oil and LNG demand).
However, Trust Economics acknowledges that there is a high degree of uncertainty surrounding these estimates as high prices will slow demand growth, while supply-side pressures combined with monetary and financial conditions will weigh on economic activity.
Global stocks will have to be redistributed amid a recovery in demand in China and a decline in Russian production, with prices hovering around $130 per barrel for the next two quarters and by the end of the year. The problem, however, is who will absorb Russia’s lost offer. The outlook for the oil market remains constructive, largely as a result of the sanctions we see in Russia. The Trust Economics points out that the EU ban on Russian oil is significant, as Russian oil flows to the EU will be reduced by about 90% by the end of the year.
The point is that the world oil market is already limited, and therefore it will not be easy for EU buyers to replace it. OPEC has limited surplus capacity, which it is reluctant to use aggressively, and an increase in US supply will not be enough to offset Russia’s supply losses. It is therefore estimated that there will be a shift in trade flows, where key non-EU buyers will increase their share of the Russian oil market. A move that would unleash another type of oil supply for Europe. India and China stand out as potential countries that will increase their market share from Russia and we already see this from India, which is constantly increasing its strategic stocks at low prices.
There is a clear incentive for this, given that Russian oil is sold at significantly lower prices than Brent. However, according to Trust Economics (https://trusteconomics.eu), these countries will find it difficult to absorb all of Russia’s oil supply going to the EU. Therefore, it is likely that we will continue to see Russian production fall below current levels. Russia’s crude oil exports have remained stable since the start of the war in Ukraine and remain at around 5 million barrels per day. Trust Economics believes that this production will then fall to 3.5-4 million barrels per day by the end of the year, as the EU will reduce its imports.
Trust Economics points out that if the EU bans insurance companies and its banks to make businesses with shipping companies carrying Russian oil in early 2023, Russian production is expected to fall by 700,000 barrels a day. If this ban is adopted in its entirety by the G7 countries, then the reduction in production will be even greater.
For the above reasons, Trust Economics believes that for 2022, the global oil market will remain in deficit, estimating only that Brent will move above $115 per barrel and on average at USD120-122 per barrel, but due to the tight market prices will be volatile especially during the summer.
The issue that arises for 2023 is an Iranian nuclear deal and whether it would lead to an increase in oil supply in 2023, to meet the Western oil demand. If there is an agreement, prices will likely remain below $100 per barrel for 2023, moving at USD 90-95 per barrel. in different way, the oil price per barrel will continue to be above $125-130.
