An oil tanker seen offshore in the Pacific Ocean along the Los Angeles area coastline in Santa Monica Bay as seen from Palos Verdes Estates, California, on March 6, 2023 – Copyright AFP PIUS UTOMI EKPEI
One year after Russia’s invasion of Ukraine, the oil market has become more fragmented and uncertain, a dynamic that is expected to boost crude prices in the long run.
The condemnation of Russia by Western governments has essentially cut Europe off from Russian supplies, leaving it more dependent on the Middle East and the United States.
That change means cheaper Russian energy imports for China and India, while countries that refuse to buy Russian crude must pay a premium to import from other suppliers.
The oil market “is radically different in some ways than it was before the invasion of Ukraine,” said Jim Burkhard, head of oil markets, energy and mobility research at S&P Global Commodity Insights.
A “true global market” with open competition “doesn’t exist anymore,” said Burkhard, who calls the current state of the market “partitioned.”
With Russia added to the list of sanctioned countries along with crude exporters Iran and Venezuela, nearly 20 percent of global supply is cut off from major markets, including the United States.
“The price of oil is based on its origin, as opposed to its quality,” Burkhard said.
The balkanization of the market also affects the routes of crude oil tankers. Europe’s ban on Russian oil forces exports from Moscow to travel farther to reach buyers.
“That means more miles traveling on the water,” Torbjorn Tornqvist, co-founder of Gunvor Group, a trading company, said at the CERAWeek energy conference in Houston. “Ship rates have been very high and have stayed high.”
Since the invasion, “we have seen fundamental change that is unlikely to be reversed anytime soon,” said José Fernández, the State Department’s undersecretary for economic growth, energy and the environment.
Many expect lasting changes.
“What I think will last a long time is the fundamental mistrust and the fundamental decision not to be dependent on Russian energy for a long time in Europe,” said Eirik Waerness, Equinor’s chief economist. “That will have long-term implications.”
– A ‘tight’ market –
The flow that followed the Russian invasion has also strengthened the position of the Organization of the Petroleum Exporting Countries.
Burkhard said the additional capacity from Saudi Arabia continues to give the group of exporters unique leverage.
But the situation has changed significantly compared to late 2016, when the Vienna-based cartel began coordinating policies with Russia.
“Russia today can’t really manage its production because it faces sanctions,” leading to production below Russia’s quota under the “OPEC+” policy, Burkhard said.
“OPEC is still very important, but OPEC+ right now is not what it was before the war,” he said.
The role of the United States in international markets has also been strengthened.
The United States, the world’s biggest oil producer, last week set a new crude export record of 5.6 million barrels a day, nearly double the 2021 level.
Still, US production has not returned to its pre-pandemic level. Key factors affecting production include the strategy of US shale producers to use excess cash to bolster balance sheets rather than increase capital spending; and shortages of materials and key personnel for oil fields.
“Volumes continue to increase, but probably could have increased further,” Waerness said of the United States.
Globally, markets continue to feel the effects of OPEC’s decision in October to cut production by two million barrels per day.
“Fundamentals are relatively tight,” Waerness said. “The additional capacity to deliver new supplies to the markets, whether we’re talking about gas or oil, is very low.”
Waerness said there are also questions about the sustainability of Russian production given the exodus of suppliers and service companies from Western oil fields.
“We don’t know how long Russia can continue to produce 11 million barrels and 12 million barrels per day,” Waerness said. “Will they be able to replace that kind of competition?”
The situation is further complicated by the focus on the energy transition, which experts say exacerbates underinvestment in conventional oil.
The result, according to Burkhard, is a higher benchmark for crude oil prices.
“We will have cycles, but the center of gravity of oil prices we think will be around $70 or $80,” he said. “That’s higher than we’ve typically seen in the last 20-30 years.”