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/ Former USSR / Economy / Energy dialogue / Oil&Gas

Global oil market anticipates major recession

Revenues grow from Russian oil exports to the EU

24.08.2022 16:37 Alexander Pasechnik, head of the Analytical Department at the National Energy Security Fund

Context:

Trump brews revolution in American energy industry

In August, the world oil market entered a correction phase: the price of a Brent barrel is finally lower than the $100 milestone. Stock gamblers have focused on "finding balance": in the second half of the month, the barrel price volatility has markedly increased. Thus, on August 16, it fell below $92 per barrel for the first time since mid-February, according to the London ICE Exchange. However, a couple of days later, prices began to once again rise and approach the one-hundred-dollar level: regular trading hours ended at around $97 per barrel these days. On the third decade’s first trading day, the cost is somewhere about this level, too.

The fluctuations are brought about by expectations of a global recession. The downward correction was also caused by media coverage on Iran. A number of outlets reported a once again approaching end of the nuclear deal negotiations (this refers to a possible lifting of US sanctions in exchange for Iran's guarantees to curtail uranium enrichment programs). This implies prompt and huge additional volumes of Iranian oil. However, judging by the barrel price dynamics in the second half of August, market participants do not really believe in negotiations success along the Washington-Iran line. Traders are more inspired by the new OPEC head’s recent statements. Haitham al-Ghais, who took office as the cartel's secretary general on August 1, said demand in the physical oil market was quite strong, with concerns about Chinese economy slowdown exaggerated. Moreover, he believes that higher tourist activity and the subsequent increase in aviation fuel consumption will help strengthen demand.

In a recent review, the International Energy Agency (IEA) raised the forecast for oil demand in 2022 by 380 thousand barrels per day, to 99.7 million. Thus, global demand for oil is expected to increase by 2.1 million b/d relative to 2021. OPEC, however, predicts a slightly different scenario than the IEA, claiming it will grow by 3.1 million b/d in 2022.

There is no saying what may happen to market dynamics further on, as the US Federal Reserve System aims to raise the key rate and divert global investments into the dollar. This may restrain oil prices. Still, investment banks have a different vision of the barrel’s future. For instance, Goldman believes Brent crude futures may reach $130 p/b, with retail gasoline prices in the United States to get back to some $5 per gallon. This can be explained by consumer transition from expensive gas to oil.

In general, global oil market faces quite a number of uncertainties. The focus is on the Fed's policy and debates of the G7 plan to establish the notorious price ceiling for Russian oil.

Meanwhile, Russian energy exports remain stable. According to Eurostat, six months into the year, European imports surplus has amounted to almost 79%, and the country remains the third largest supplier to the European Union. The growth occurred in monetary terms precisely, while physical volumes of hydrocarbon supplies declined.

Simultaneously, the Russian Federation is ramping up supplies to China. In July, its oil imports to the country amounted to 7.15 million tons, which is 7.6% more than last year. This was reported by Reuters with reference to the Chinese General Administration of Customs. Russia remains its major oil supplier for a third consecutive month. Yet the daily supply indicator — about 1.68 million barrels — proved lower than the record two-million-barrel level of May. Since the turn of the year, Russia’s oil imports to China amounted to a total of 48.45 million tons, which is 4.4% more than in 2021. However, the latest data from Vortex reveal a reduction in July: the Sinopec concern has only accepted three shipments from the Russian Far East — US "substitution" in operation.

There are other alarming signals. Reuters writes that in July, India preferred cheaper Saudi oil over Russia’s and curbed purchases for the first time since March of this year (an about 7.3% decrease as compared to June).

But in general, practice has shown that Russian oil is still in demand, even in Europe and a number of other US-allied "locations". The American authorities are already apprehensive about a European split in this regard. Washington's promise to convince the G7 to introduce a "ceiling" mechanism for Russian oil prices by December is highly questionable.

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