Global energy networks are facing a tectonic shift. The WTI benchmark and Brent Crude both breached $120 per barrel today, achieving three-month highs on the back of Saudi Arabia’s decision to raise export prices.
Saudi Arabia increased the official selling price (OSP) of the benchmark Arab Light by $2.1 per barrel for Asian customers, which was higher than expected, and reflected supply shortages and tightness in the market. to a higher-than-expected $6.5 per barrel.
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The decision was also driven by the re-opening of China, with restrictions being eased further in major centers such as Shanghai and Beijing over the weekend. Operating rates of key industries in China improved, while domestic demand is expected to pick up as well. The streamlining of bottlenecks and improvement in logistics will support foreign orders.
OPEC+ optics
The decision comes in the immediate aftermath of the much-followed OPEC+ meeting, where Saudi Arabia steered the group to adopt 50% higher quotas than expected.
In practical terms, this had no effect with several members such as Angola, Nigeria, and Russia struggling to meet even their earlier targets.
Further, analysts at JP Morgan say that spare capacity among members is so limited that they “expect the increase in…. output to be about 160,000 barrels per day in July and 170,000 bpd in August.”
Moreover, the tightness in the petroleum chain is driven by refined products, due to the lack of refining capacity which can’t easily be restored.
Saudi Arabia also increased prices for European and Mediterranean customers, while leaving American exports unchanged amid sky-high gas prices.
A challenge for Europe is that her refineries are largely ill-equipped to refine high sulfur middle eastern crude. The US is considering easing restrictions on Venezuela, and shipments to Europe are expected to begin this week.
President Biden was expected to travel to the Kingdom in hopes of securing more oil production, to ease gas prices in the run-up to the mid-terms in November. However, this trip has surprisingly been postponed.
The stickiness of oil prices
Oil prices will likely remain high at least in the medium term, given the expected increase in demand from China and the USA. Supply shortages will persist due to a lack of labor and investment in refineries. Some US refineries are already running at unsustainably high rates of above 90%.
New supply is not being brought online fast enough. EU’s partial ban on Russia has essentially forced a major portion of global oil out of the European market. Moreover, the Iran deal which was expected to deliver oil to European countries has been delayed till at least 2023.
Potential effects
Higher crude prices may make Russian imports more competitive within Asia, cementing its position, especially vis-à-vis China, the world’s number 1 crude importer.
The higher price of crude oil in Asia may have knock-on effects on food and energy inflation.
The outsized role of food prices in consumption baskets in developing countries may rapidly raise inflation expectations, accelerate rate hikes, and pressure household budgets. Food inflation in some cases, “is a stronger concern than top-line inflation”, as per Moody’s APAC economist, Steve Cochrane.
This could lead to more monetary policy tightening, which in turn is expected to lead to added volatility in commodity markets while re-enforcing an upward trend.
Downside risks to oil
The primary threats to oil demand are if monetary and quantitative tightening leads to demand destruction and ushers in a recession.
A second factor could be the resurgence of covid spread in China, which would gravely reduce energy demand once again.
If Russian supplies to Asia continue to strengthen, the overall global deficit is expected to narrow to between 1 and 1.5 million barrels, capping price pressures.
Forecasts
Oil prices will continue to firm particularly during the summer driving season. Both Citi and Barclays revised their average price targets, with the former expecting $113 per barrel in Q2, and the latter predicting $111 per barrel over this year and the next.
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Source: https://invezz.com/news/2022/06/06/saudi-arabia-raises-oil-export-prices-to-asian-customers/