On the anniversary of the outbreak of the Russia-Ukraine conflict, the United States, the European Union and others continue to tighten sanctions on Russia, and the crude oil market supply has once again caused concerns. In fact, in the past year, the crude oil market has mainly focused on the expected magnitude of the impact of the geopolitical conflict between Russia and Ukraine on the supply side and its actual realization.
By sorting out the market, the reporter observed that since the conflict between Russia and Ukraine, oil prices first rose and then fell. In the first half of 2022, affected by supply-side factors, oil prices remained high, with Brent oil once rising to around US$140/barrel; from the second half of 2022 to the present , the center of gravity of oil prices continued to fall, and the market focus gradually turned to the demand side. Especially after the US inflation exceeded expectations, the Federal Reserve continued to raise interest rates sharply, and the market’s concerns about the economic recession in the United States and Europe increased. How do you view the new changes in the supply and demand pattern and trade flows in the crude oil market since the Russia-Ukraine conflict? What impact will the later evolution of the situation between Russia and Ukraine have on the crude oil market?
Geographical risk premiums have fallen sharply
The impact of geopolitical conflicts on the crude oil market is first reflected in prices, bringing risk premiums to crude oil.
A reporter from Futures Daily learned that after the conflict between Russia and Ukraine broke out, Western countries continued to impose sanctions on Russia, and the market was worried that Russian crude oil exports would be greatly affected. Considering the important position of Russian crude oil in the global market, supply-side risks have driven up oil prices. This has resulted in a higher geopolitical premium in the crude oil market.
“Since the second half of 2022, despite Russia being subject to sanctions, Russian oil production and exports have maintained considerable resilience. Production has remained around 11 million barrels per day, and exports have been around 8 million barrels per day. The International Energy Agency has also continued to raise Russian oil production expectations. Although the EU imposed embargoes on Russian crude oil and refined oil products on December 5 last year and February 5 this year respectively, this event has been fully anticipated and priced by the market and has little impact on oil prices. Therefore, The geopolitical premium previously caused by the Russia-Ukraine conflict in the crude oil market has basically dropped to zero.” said Liu Shunchang, an energy and chemical analyst at Nanhua Futures Research Institute.
“The United States, together with the G7 and the European Union, began to propose the concept of price limits for Russian crude oil in July 2022. In early December, the agreement was implemented with a price ceiling of US$60/barrel. At present, it seems that the impact of this price on Russian crude oil exports is lower than expected.” Zhao Ruochen, an energy researcher at Haitong Futures, said that if Russian oil is sold above the price limit, Europe and the United States will no longer provide ship leasing and insurance services.
In her opinion, the price ceiling of US$60/barrel is higher than market expectations. Looking at Russia’s main oil products, the price of Ural crude oil has recently been at US$50-60/barrel, and the risk of sanctions is small; while ESPO crude oil The price is between US$70 and US$80 per barrel, which is within the sanctioned range. Then after the price limit, ESPO crude oil can only be transported through non-EU ships and insurance.
According to Gao Mingyu, chief analyst of SDIC Essence Energy, the discount of Urals crude oil to Brent has widened significantly due to proactive trade hedging after the outbreak of the Russia-Ukraine conflict, and has basically maintained a discount of US$32/barrel since February. The water level is sufficient to meet the price ceiling of $60/barrel.
However, judging from the actual transaction prices of major importing countries, taking China as an example, the discount of the landed cost of imported Russian oil to Brent reached US$19.5/barrel in June last year, and then as Russian oil purchases returned to normal , the import price discount has remained at the historical normal level of less than US$5/barrel since August last year.
“In response to the distortion of Urals crude oil quotes, Russia is planning to change the tax base for crude oil producers from Urals crude oil to Brent crude oil. The initial discount may be 20-25 US dollars per barrel. This move will increase domestic production. This will help reduce the tax burden on businesses and boost Russia’s production cuts,” Gao Mingyu said.
In fact, measures such as sanctions against Russia and price limits on Russian crude oil played an important supporting role in oil prices in the first half of 2022, but this supporting role continued to weaken in the second half of 2022.
In this regard, Liu Shunchang explained that when Western countries stated that they would impose an embargo and price ceiling on Russian oil, the crude oil market began to anticipate and gradually set prices. When Russia’s oil production and exports proved to be highly resilient, the embargo and price The impact of the upper limit on oil prices is relatively limited. The situation of “buy expectations and sell facts” was reflected in this incident.
“As sanctions in Europe and the United States continue, cutting off the EU’s dependence on Russian crude oil is a non-market adjustment behavior that will change the flow of Russian and European crude oil shipping trade, restructure new trade flows and produce a chain effect, leading to global oil shipping trade The flow direction has changed and transportation efficiency has decreased. The entire crude oil and refined oil markets still need time to stabilize, the supply and demand situation still needs to be stabilized, and the risk of supply and demand mismatch still exists, and the risk premium this brings to crude oil will still be reflected in the oil price.” Zhao Ruochen said.
New changes in production increases and decreases will affect the supply and demand balance sheet
The conflict between Russia and Ukraine also brought about changes in the supply and demand side of the crude oil market, restructured the market structure, and had an impact on the market that exceeded market expectations.
From the supply side, in Russia, due to factors such as the Russia-Ukraine conflict and sanctions, the market expects that Russia’s crude oil production and exports will decrease significantly in the short term. However, Russia’s actual production and exports have not declined, which is also beyond the market expectation. In terms of OPEC+, anyThe plan will continue.
At present, there are no signs of substantial improvement in the situation between Russia and Ukraine. As far as the oil product market is concerned, the impact of trade flow restructuring and supply reduction caused by trade sanctions against Russia still deserves attention.
“On the one hand, the European Union’s price limits and embargo on Russian refined oil products officially came into effect on February 5. Unlike crude oil and fuel oil, traditional refined oil trade is mainly based on inter-regional flows. The lack of cross-regional shipping capacity means that trade flows have shifted. It is difficult to completely replicate the experience of raw oil products. The passive decline in Russian refinery operations will further lead to a reduction in crude oil production. Currently, Russia has announced that production in March fell by 500,000 barrels per day compared with January. On the other hand, due to the decline in tanker freight rates in recent years Affected by the continued downturn, it is expected that the delivery volume of crude oil tankers and product oil tankers will drop to the lowest level in the past 10 years in 2023, with the fleet growth rate only 1%-2%, and the trade flow after the transfer of crude oil and product oil will shift from efficiency priority to Safety is given priority, the demand for sea transportation is facing a structural increase, and the tanker freight market is generally improving, which will form a strong support for the CIF price of crude oil and refined oil products.” Gao Mingyu said.
In Liu Shunchang’s view, the subsequent development of the situation between Russia and Ukraine will have a marginal impact on oil prices. Rosneft’s strong transshipment capabilities enable it to still export crude oil that exceeds market expectations even when it is subject to sanctions. “The core factors that determine the crude oil market in the future will focus on two aspects: on the one hand, global economic growth, including the economic growth of the United States and Europe and the recovery of the Chinese economy after the Federal Reserve continues to raise interest rates; on the other hand, OPEC+ production policy.” He said.
At present, the energy market has gradually emerged from the panic of supply cuts and has basically entered a state of rebalancing after reduction. The geo-risk premium has fallen sharply, but geo-influence has not exited the market and may re-ignite oil price fluctuations at any time. The supply of the crude oil market is still fragile, and oil prices may become volatile again at any time due to rising geopolitical events. At present, OPEC+ and Russia are following The supply-side game between the United States continues.
“Looking ahead to the market outlook, on the supply side, Russia’s ability to maintain crude oil exports will be a variable factor in the future. On the demand side, we need to focus on whether the U.S. economy can have a soft landing and whether China’s demand recovery can meet expectations.” Zhao Ruochen said.
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