High Possibility: A Global Oil Supply Shock on a Never-Before-Seen Scale

By IndraStra Global Editorial Team

The International Energy Agency (IEA) said in its monthly Oil Market Report that sanctions on banks and customers' unwillingness to acquire Russian oil might result in the largest oil supply crisis in decades. 

Since Russia invaded Ukraine in late February, the United States has prohibited Russian energy imports, and the UK plans to phase out Russian supplies by the end of the year. Although Europe has not sanctioned Russian oil and gas, an increasing number of European buyers have pledged not to buy it. J.P. Morgan Global Research estimates that as of last week, up to 66 percent of Russian seaborne spot cargoes were unsold.

With OECD economies' inventories considerably below the five-year average and at their lowest levels in eight years, the Russian invasion of Ukraine came at a bad time.

Immediate Replacement For Lost Russian Oil

The immediate remedy to the loss of Russian oil production resides with Saudi Arabia and the United Arab Emirates — the two most powerful OPEC members, who, along with Russia, have been managing market supply under the OPEC+ agreement for several years.

To cover the expanding gap left by importers' “self-sanctioning” of Russian oil, Saudi Arabia and the UAE have not come forward. The UAE last week confounded the oil market by supporting greater OPEC+ production increases, but energy minister Suhail al Mazrouei later confirmed the UAE's commitment to moderate hikes.

OPEC+ agreed on March 2 to maintain a 400 kb/d output increase for April, claiming no supply deficit. “Saudi Arabia and the UAE, the two producers with significant spare capacity, have yet to utilize their reserves,” the IEA reported.

However, if the Saudis and UAE utilize their reserves, the global spare capacity—largely in their hands—would be so thin that a disruption in Russian oil supplies, or another outage in Libya, would guarantee a price surge.

For the time being, U.S. Shale can't pump much more.

Because there is a time lag between drilling and first oil, as well as because of years of underinvestment, capital discipline, and negative federal policies toward the oil business, producers have been saying this for months.

ConocoPhillips CEO Ryan Lance recently told CNBC that the first drop of fresh oil would arrive in eight to 12 months even if the company elected to pump extra oil today.

According to a recent J.P. Morgan report, despite price signals, shale output cannot expand by more than 1.4 million barrels per day this year because of labor and infrastructure restrictions.

Another possibility is that Iran might increase exports by about 1 million barrels per day (bpd) during a six-month period if and when a deal is struck, according to the International Energy Agency (IEA).

Demanded

The IEA predicts that rising energy prices, tightened monetary policy to combat inflation, and Russian sanctions will “significantly slow global economic growth.”

For 2022, the EIA reduced its global oil demand prediction by 950,000 bpd, down from mid-forecast. February's The IEA projects total consumption at 99.7 million bpd in 2022, up 2.1 million bpd from 2021.

Even if demand growth slows, it will not compensate for the loss of Russian supply, leaving the market in deficit if the boycott of Russian oil continues throughout the year.

An earlier OPEC market report also warned of weakening economic and oil demand growth. “Remains under assessment,” OPEC stated, citing Russia's war in Ukraine and skyrocketing prices. The cartel kept its forecast for global oil demand growth in 2022 at 4.2 million bpd, but warned of “extreme macroeconomic uncertainty.”

According to OPEC, the global economic concerns, including slowing GDP, rising prices, and continued geopolitical upheaval, will harm oil demand in many regions. With inadequate evidence to grasp the far-reaching repercussions of this dispute, forecasts are shifting virtually daily, making it difficult to peg down numbers with a reasonable degree of certainty.

The OPEC+ group led by Saudi Arabia and Russia meets again on March 31, and the high and fluctuating oil prices are likely to increase pressure on the OPEC members of the alliance to increase supply to offset Russian losses.

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