Executives fear that Russia's wild card will keep oil markets on edge

Energy markets are now balanced, according to executives and officials from some of the world's largest oil and gas corporations, but they could quickly be disrupted due to tight spare production capacity and supply uncertainties relating to Russia's involvement in Ukraine.

The comments made at the CERAWeek energy conference in Houston demonstrate that the industry is still on edge after dealing with the immediate aftermath of one of the most significant shocks to global energy flows in recent memory. A mild winter helped by relieving big European customers of the typically heavy demand for heating fuels.

“There is very small spare capacity available so small changes in supply have impact,” said Anders Opedal, Chief executive of Norwegian energy giant Equinor (EQNR.OL). “It is easy for the market to move in either direction.”

Opedal anticipated that Europe's natural gas supply instability after Russia invaded Ukraine and shut off regional supplies will remain in 2024 and perhaps 2025. Tighter global crude supplies are also expected, after the Kremlin's threat last month to reduce production by 500,000 barrels per day (bpd) beginning in March.

According to an executive who attended a private dinner on the margins of the conference on Monday, American energy executives and top OPEC officials raised concerns about a shortage of spare oil production capacity.

“We may have gotten through this winter surprisingly well, but I don’t think we’re out of the woods yet,” said Michael LaMotte, senior managing director of investment firm Guggenheim Partners. “And things actually could get worse before they get better.”

Algeria, a member of the Organization of Petroleum Exporting Countries, is investing $40 million in upstream operations to meet demand, particularly in Europe, according to Mohamed Arkab, the country's minister of energy and mines.

RUSSIA'S PRICE CAP IS ACTIVE

Due to limited spare capacity, states penalising Moscow for the invasion of Ukraine must impose a price restriction on Russian oil rather than limiting the country's ability to export crude, according to Frederic Lasserre, Gunvor's worldwide head of research and analysis.

The price cap, designed to cut Russian income without restricting shipments, was working well, according to US energy ambassador Amos Hochstein, because Russian oil was still reaching the market.

On December 5, the Group of Seven countries, the European Union, and Australia imposed a price ceiling on seaborne cargoes of Russian oil, setting it at $60 per barrel.

On February 5, the G7 and its allies imposed a price ceiling on Russian petroleum sales.

The Kremlin stated on Tuesday that it does not recognise the price cap.

Despite Russian oil is still reaching the market, it is at a higher cost since ships must travel longer distances to reach nations that have not implemented sanctions, according to Chevron CEO Mike Wirth.

OPEC Secretary General Haitham Al Ghais stated on Tuesday that rerouting of Russian crude supplies to nations such as China and India is not a concern.

IS THE OIL MARKET STABLE?

Representatives from Gunvor and Kuwait Petroleum Corp, among others, reassured CERAWeek participants that the oil market has stabilised and attained balance, removing concerns about crude, petrol and fuel shortages this winter.

But, the oil market forecast becomes murkier later this year as corporations, consumers, and governments grapple with variables ranging from fears of a global recession and increased interest rates to rising energy demand from China as it exits coronavirus restrictions.

According to OPEC's Al Ghais, China's oil demand will rise by 500,000 to 600,000 barrels per day in 2023, while world oil demand will rise by 2.3 million barrels per day.

Crude prices could rise in the second half of the year as Chinese demand returns to the market, according to Gunvor CEO Torbjorn Tornqvist on Monday.

US Federal Reserve Chair Jerome Powell told lawmakers on Tuesday that the central bank will likely need to hike interest rates more than expected to control inflation.

“This year is going to be a harder environment, driven by wider macro economics, also combined with what is going on with flows from Russia,” said Savvas Manousos, CEPSA’s executive vice president of global trading.

By fLEXI tEAM