Fissures In The Oil Barrel
08 Jun 2022
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The war in Ukraine did not work in oil’s way, rather it only helped to reverse the rising trend in crude oil prices in the international markets. A slump in oil prices amidst tight supplies has come as a big shock for producer cartel Opec that was hoping big on supply curbs imposed by the expanded group that also included Russia.
The forced exclusion of Russian oil from the international markets is something that Optec did not anticipate. The western sanctions on Russia and the subsequent loss of demand for its oil caused a piling up of oil inventories, forcing the country to sell it cheap – to buyers mostly from China and India.
The potential ramp-up of Russian crude purchases has adversely impacted on India’s spot purchases. India is reported to have bought more than 40 million barrels of Russian oil between February and May. This is about 20 per cent more than all imports of crude in 2021.
A Bloomberg report citing Keller data said Russian oil arrivals into India for May peaked to 740,000 barrels a day, up from 284,000 barrels in April and 34,000 barrels a year earlier.
This has caused a dent in spot market purchases with some of the largest buyers suspending market operations against cheap oil from Russia. Global prices of benchmark crudes that have marched higher for several weeks on Optec supply cuts, declined sharply.
Russian exports have been squeezed by EU and US sanctions against Moscow over its invasion of Ukraine, actions that Russia calls a "special operation".
While China's gradual emergence from strict Covid-19 lockdowns has added to price support, speculation that Saudi Arabia may step up production weighed on the market, say analysts.
A report in the Financial Times on Wednesday cited sources as saying that Saudi Arabia is prepared to raise its oil production if Russia's output falls substantially because of the Western sanctions imposed on it.
Production increases scheduled for September would be brought forward to July and August, the paper said.
Market men reacted to the news by unwinding long positions in order to remain ready to quickly respond as and when Saudi Arabia raises production.
But, with oil prices already down, Optec or the expanded group is unlikely to change their policy.
The Wall Street Journal reported on Tuesday that some OPEC members were considering suspending Russia from the agreed production plan, to allow other producers to pump significantly cruder, as sought by the United States and European nations.
Russia's economy and oil production have suffered since its late-February invasion of Ukraine, which led to Western sanctions and bans on energy imports from that country. Its oil output was down by 7.5 per cent as of mid-April, and the Kremlin said it could fall as much as 17 per cent this year.
The Optec members are looking at whether to kick Russia out from the group's deal to gradually increase oil production, after the country missed its target.
Some Opec+ sources said on Wednesday that Opec was set to stick to its modest monthly increases in oil output, despite seeing tighter global markets.
Still others expect Opec+ will keep its production policy unchanged. Russian foreign minister Sergei Lavrov is visiting Saudi Arabia ahead of Opec’s technical meeting.
