Are we on the doorstep of a global oil supply shock? “Unprecedented” sanctions imposed on Russia over the past several weeks could trigger the “biggest supply crisis in decades” for global energy markets, according to the International Energy Agency’s (IEA) March Oil Market report. The raft of sanctions Western countries have imposed on Moscow has included a ban on energy trade with Russia, with the UK and US announcing early last month that they would ban the import of Russian fossil fuels. Along with these restrictions, “major oil companies, trading houses, shipping firms and banks have backed away from doing business with the country,” the IEA notes. Oil majors such as Shell and BP are among those severing or suspending business ties with Moscow.
In case you needed reminding, Russia is a major anchor of oil markets. The country accounts for the lion’s share of global oil exports, “shipping 8 [mn barrels per day] of crude and refined oil products to customers across the globe.” Sanctions are expected to push down Russia’s oil output by some 3 mn barrels per day (bpd) this month as buyers shy away from the oil Moscow produces, the IEA said.
Global inventories are already at record lows: Compounding the problem of Russian oil falling out of the market is the fact that OECD oil inventories in January were already 335 mn barrels below their five-year average and at their lowest point since 2014, the report said. Oil producers will likely have to dig deeper into thinning reserves over the coming year to cover the supply crunch.
This downturn in supply means prices are going up — and forcing a depression in demand: The IEA has revised downwards its projections for growth in oil demand to 2.1 mn bpd during 2022, marking a 1 mn bpd reduction from its previous estimates, which puts consumption levels at 99.7 mn bpd over the course of this year.
And tight supply + soaring prices = downward pressure on global GDP growth: High oil prices, which are up around 30% year-to-date, will continue to “increase inflation, reduce household purchasing power and are likely to trigger policy reactions from central banks worldwide — with a strong negative impact on growth,” the report said. “Surging energy and other commodity prices, along with financial and oil sanctions against Russia, are expected to to appreciably depress global economic growth,” the IEA said.
So far, there are no indications that consumer demand in Egypt has shifted — likely at least in part because oil prices, which are set on a quarterly basis, have remained fixed throughout the crisis so far, with the government’s fuel pricing committee set to meet any day now to determine the new prices at which it will peg different types of fuel for the next three months. Prime Minister Moustafa Madbouly has, however, called on members of the public to limit their fuel consumption as the government has grappled with soaring oil prices.
Are there alternatives to plug the shortfall? Yes and no. Saudi Arabia and the UAE, OPEC’s second- and third-largest energy producers, could potentially cover the gap left in oil output, the report says. The most recent meeting of the oil cartel saw member countries agreeing to ramp up production by a modest 430k bpd as the organization gradually winds back covid-era production cuts. The group said that oil markets remain “well-balanced,” with current volatility “not caused by fundamentals, but by ongoing geopolitical developments.”
There’s also the technical problem of smoothly replacing a production shortfall of this scale: OPEC has long been unable “to meet its agreed quotas, mostly due to technical issues and other capacity constraints, which has already led to sharp draws in global inventories,” the IEA said in its report. This is a concern which was echoed by OPEC’s secretary general, who earlier this month said that there was “no capacity in the world at the moment that can replace 7mn barrels [a day] of exports” from Russia.
That leaves the option of tapping into reserves: Saudi Arabia is estimated to have some 2 mn bpd of oil in its reserves, while the UAE possesses some 1.1 mn bpd, but are unlikely to tap into their reserves, the IEA suggests. The US had separately moved to unlock 30 mn barrels of crude from its reserves — as part of a coordinated effort with other countries to shore up global supply that will see the release of 60 mn barrels — after Washington moved to impose energy sanctions on Moscow.
What about Iran? Tehran’s 1.2 mn bpd of reserves could become a useful patch for the global supply disruption but that would first require sanctions relief and an agreement over a nuclear agreement. “Should an agreement be reached, exports could ramp up by around 1 mb/d over a six-month period,” the report said. Production growth for now will most likely come from the US, Canada, Brazil and Guyana, but “any near-term upside potential is limited,” it cautioned.
Could this all bode well for the global shift away from fossil fuels? The supply crunch could have “lasting results” on the global energy market, including forcing a rethink of fossil fuel reliance and speeding up the green shift, the report suggests. “Indeed, today’s alignment of energy security and economic factors could well accelerate the transition away from oil,” the IEA said.
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