As of January this year, analysts predicted that in 2022 crude oil market will see higher demand while allowing for an oil rally of up to $100 a barrel on tight supply. Then on February 24, Russia invaded Ukraine and Western countries imposed bruising sanctions on Russia fuelling high prices.
Oil prices retreated after having hit more than $130 per barrel, a 13-year high, on Sunday evening as markets panicked over a possible embargo of Russian crude oil.
The United States and its European allies are discussing a ban on Russian oil imports in the latest attempt to punish the Russian government for invading Ukraine. But this has been a hard sell in Europe where fears of rising gas prices have dulled appetites for sanctions on oil.
Meanwhile, the concerns that contributed to sending oil prices above $90 a barrel in January are still present. Libya’s crude oil production averaged nearly 1.2 million barrels per day (bpd) during 2021. In late December 2021, armed militants shut in an estimated 370,000 bpd from the four key oil fields in the south-western part of the country.
“We estimate that 0.4 million bpd of crude oil production went offline in Libya in late December 2021. This unplanned outage contributed to the increase in the Brent crude oil spot price to $90 per barrel (b), as of January 19, 2022, which was $16/b more than the December average,” said the United States Energy Information Agency (EIA).
OPEC member countries, including Nigeria, are unable to meet their production quotas; this is in addition to their unused spare capacity. This situation is leading to tight supply when economies have opened up after people have accepted to live with the reality that COVID-19 would be here longer than expected.
“We estimate that OPEC members still have more surplus production capacity than they have had on average in the past. OPEC’s surplus crude oil production capacity increased to nearly 9 million bpd in mid-2020 as the onset of the COVID-19 pandemic greatly reduced demand, causing producers to lower output,” said the EIA.
Nigeria, Africa’s biggest oil producer, has been unable to meet its supply quota from OPEC, struggling to produce barely 1.3 million bpd when it should supply as much as 1.6 million bpd.
Timipre Sylva, minister of state for petroleum resources, in remarks at an energy conference in Abuja last week, said Nigeria was unable to take advantage of rising prices.
He said, “The rise in crude oil prices is not something to celebrate. In Nigeria, right now we are a net importer of petroleum products and when the prices of crude oil go up it affects the prices of petroleum products.
“So, for us who are the net importers, it is not very good for us. What we are saying is that if you are going to produce more and you get more dollars from your production, then it gives you more money for your imports.
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“But if you are now producing less and then you still have to make sure that the Nigerian market is supplied fully with petroleum products, then you will see that there will be a shortfall.”
Amidst this supply constraint, the Russia-Ukraine war has blown a hole through the oil market. The EIA said in a note last week that the geopolitical risk related to Russia’s further invasion of Ukraine had contributed to higher and more volatile crude oil prices.
The ensuing sanctions on Russia by the United States and their European allies have been so comprehensive that personal assets, travel bans, asset freezes, payment solutions and sanctions on the Russian central bank have sent oil markets reeling.
US, European and other governments exempted energy trade from sanctions to prevent already tight markets rallying further, but that has failed. Traders say it has thrown Russian oil trade into chaos as producers postponed sales, importers rejected Russian ships and buyers worldwide searched for alternative supply.
“Europe is seeking alternatives, with reports suggesting that refiners should avoid taking Russian oil supplies. At the same time Russia is still able to find a market for the majority of its production by offering discounts in the order of $15-20,” said Maciej Kołaczkowski, manager, oil and gas industry at the World Economic Forum, Geneva.
Analysts already say prices could reach $150 per barrel if Russian oil is sanctioned. But even without a sanction on oil, prices have risen to record highs.
“Because of the banking sanctions we’ve estimated about 70 percent of Russian crude oil exports can’t be touched. That’s about 3.8 million bpd,” Amrita Sen, director of research at Energy Aspects, told CNBC last week.
Russia is the second largest exporter of crude worldwide, trailing only Saudi Arabia. It ships out 4 million to 5 million bpd of crude, along with 2 million to 3 million bpd of refined products.
Russia’s crude and refined product exports have dropped by one-third, or by 2.5 million bpd, this week, according to estimates from Energy Intelligence based on shipping data and interviews with traders.
