Filenews 2 March 2022
By Javier Blas
The global oil market is suffering a shock that is beginning to look like the biggest turmoil since the Gulf War in 1990-91.
A large chunk of exports of Russian crude and refined products no longer find buyers, and the indications point to even more problems by next week. Brent and West Texas Intermediate crude oil soared above $105 a barrel for the first time since 2014. In negotiations in London late on Tuesday, the WTI was up more than 10% in one of the biggest daily surges ever.
Most importantly, the criteria that measure the short-term "dystocia" of the market are increasing. The price difference between a barrel of Brent that is now being delivered and the one delivered in a year has widened to more than $13.50 a barrel, the largest since Saddam Hussein invaded Kuwait nearly 32 years ago.
The situation requires exceptional measures, similar to those used by central banks during the 2008-09 global financial crisis, to overcome the supply shock. Here are six key points:
"Self-cancellations"
*First, a problem that traders call "self-declarations": market participants simply refuse to do business with Russian oil, even though Western governments are leaving it out of the sanctions they have imposed on Russia for its invasion of Ukraine. The reasons include confusion about what is legally allowed and what is not, fears of reputational damage or moral objections.
Russia exports about 5 million barrels of crude per day, plus nearly 3 million barrels of refined goods. Estimates of potential losses are difficult to make, but oil traders believe exports are likely to suffer a notable drop by the end of next week, reflecting the collapse in demand from refineries.
All of the above suggest that up to 2 million barrels of Russian oil exports per day (crude and refined products) are at risk, or about 25% of their total. The situation is fluid and some traders and executives are expecting bigger losses, with some claiming that 30%-50% of Russian oil's seaborne flows do not find buyers at the moment. If the latest figures turn out to be correct, the disruption could exceed 4 million barrels per day.
In the clearest sign that almost all buyers of Russian oil have left the market, the country's iconic crude was offered on Tuesday at a record discount of $18.60 a barrel under the Brent benchmark. Even at this extraordinary discount, several times greater than the usual difference of two dollars, there was not a single offer for the barrels.
Shipping and banks
*The biggest obstacle to trade in Russian oil is shipping. Sovcomflot, the state-controlled Russian company - the largest owner of medium-sized tankers in the world, called Aframaxes - is largely avoided. Other key companies and tanker operators, including Maersk Tankers and Torm, have announced that, for the time being, they are not undertaking new Russian contracts for the transport of oil by sea.
When a tanker is available from a daring owner, it costs up to 300% more than a few days ago, making fares prohibitively expensive. Beyond the shipping industry, many banks also refuse to do business with Russian oil, even though Europe and the U.S. gave a general exemption from their sanctions to allow energy payments.
Strategic reserves
*The International Energy Agency (IEA) agreed on Tuesday to release 60 million barrels of its members' strategic oil reserves, but this is not even roughly close to covering the possible drop in Russian oil exports if "self-ratifications" continue.
If the release is intended to cover only 30 days, it equals 2 million barrels per day, which corresponds to what traders estimate as current losses. However, the losses may eventually prove to be much greater. IOC members maintain emergency reserves of 1.5 billion barrels, so they can release much more oil - and faster.
The IOC should also call on China and India to make use of their emergency reserves. The lesson from the economic crises of this century is that the various kinds of authorities must make use of stormy measures. Releasing emergency quantities is, however, a losing battle: the IOC is facing an undeclared potential deficit, having a finite reserve. Demand management is therefore vital. Even at the risk of bringing back memories of Jimmy Carter's time, Western leaders should encourage energy savings as early as now.
Saudi Arabia and the UAE: The role of OPEC
*The US, Japan and Europe should exert diplomatic pressure to persuade Saudi Arabia and the United Arab Emirates to immediately increase production well above their current OPEC+ quotas.
It is in the interests of Riyadh and Abu Dhabi to help stabilise the market. So far, both Saudi Arabia and the United Arab Emirates seem to be sided with Russia. If they do, they will find themselves on the wrong side of the story. OPEC+ meets via teleconference on Wednesday and, in its latest meetings, the cartel has supported an increase in production of 400,000 barrels per day each month. Given the current turmoil, this quantity is not enough.
American shale oil
*US President Joe Biden should use his State of the Union address to encourage US oil producers to boost production.
Shale oil production in the U.S. should move in terms of wartime. Many in the U.S. oil industry will be tempted to say "we told you so!" regarding the devaluation of the U.S. domestic energy industry. Maybe they are right, but this is the wrong time for recriminations. Keep up the work and passionately draw black gold from the ground.
With oil at $100+ a barrel, every U.S. shale oil producer is able to pay dividends, reduce their debt and boost spending. The industry must not - and this is crucial - use this opportunity as a 'blank cheque'. It must recognise that this is a moment of crisis. We don't have a situation of going back to "pierce without limits!".
The Iran dilemma
*Finally, a nuclear deal with Iran would help mitigate the crisis, ensuring the return of about 500,000 barrels a day in a relatively short period of time to the international oil market and another 500,000 barrels a day in about six months.
However, an agreement between Tehran and the United States, Europe, China and Russia is uncertain, with diplomats fighting against the clock in talks in Vienna this week.
Iran appears to see the current oil shortage as a lever for extracting further concessions. Without a deal with Iran, the prospects for the oil market will become even darker and dreadful. Currently, the chances of a deal look like 50%-50%.
Source: BloomberOpinion
