ANS stays above $120
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New China COVID-19 lockdowns and Fed rate hike pare benchmark prices
Alaska North Slope Crude closed at $127.77 per barrel June 8, but then joined West Texas Intermediate and Brent in a week-long slide after the city of Shanghai reinstated restrictions on movement to quarantine the spread of new COVID-19 cases, sparking uncertainty over fuel demand recovery in China.
The Chinese financial and industrial center of more than 25 million residents had just celebrated an easing of lockdowns at the beginning of June.
“Crude futures are also in an overbought condition and a corrective phase is definitely due,” Dennis Kissler, BOK Financial senior vice president of trading told Bloomberg June 9. “Prices have to take a breather at some time and the new possible COVID issues in China are assisting this morning.”
The slide accelerated June 15 as the U.S. Federal Reserve announced a 0.75% interest rate increase to fight inflation, sending ANS $2.24 lower to close at $121.91, as WTI plunged $3.62 to close at $115.31, and Brent slid $2.66 to close at $118.51.
The rate hike was the largest since 1994. Along with oil prices, U.S. equity markets fell leading into the Fed announcement.
“Inflation can’t go down until it flattens out,” Fed Chairman Jerome Powell said in a press conference, adding that inflation was surging due to various economic factors the Fed cannot control, including the war in Ukraine, COVID-19 lockdowns lifting in China, commodity prices and supply chain disruptions.
Powel took special aim at gasoline prices.
“All over the world, you are seeing these effects, and we’re seeing them here, gas prices at, you know, all-time highs and things like that,” Powell said. “That’s not something we can do something about.”
ANS fell $1.93 June 14 to close at $124.14, while WTI slid $2.00 to close at $118.93, and Brent slid $1.10 to close at $121.17.
On June 13, ANS rose 8 cents to close at $126.07, while WTI and Brent each rose 26 cents to close at $120.93 and $122.27, respectively.
The week ending June 10 saw oil posting its seventh weekly gain, despite red ink on Thursday and Friday.
ANS fell 94 cents June 10 to close at $125.99, as WTI fell 84 cents to close at $120.67, and Brent fell $1.06 to close at $122.01.
ANS lost 84 cents to close at $126.93 June 9, while WTI fell 60 cents to close at $121.51, and Brent fell 51 cents to close at $123.07.
Falling prices on June 15 were prodded by a drawdown in U.S. commercial crude inventories, which increased by 2.0 million barrels over the week ended June 10, the Energy Information Administration said in figures published the same day. Inventories were 14% below the five-year average for the time of year.
Gasoline inventories fell over the period by 0.7 million barrels, 23% below the five-year average for the time of year.
Supply shortages loomAlong with other oil producers, Russia is currently enjoying a surge in oil export income due to higher prices, but export volumes may plummet later in 2022.
The U.S. has outlawed imports of Russian oil and the European Union has agreed to phase in prohibitions this year on seaborne imports of Russian crude.
Adding to the obstacles the Russians will face finding buyers, the EU is coordinating with Group of Seven members to ban insurance of Russian oil cargoes.
Fitch Ratings believes that redirecting of all Russian oil and products volumes may not be possible due to infrastructural limitations, buyers’ self-restrictions and logistical complications, such as the ban on insuring Russian oil cargoes.
Fitch estimates that 2 million barrels per day to 3 million bpd - a quarter of the country’s oil production - may disappear from the global market by end-2022.
The EU ban will have a significant impact on global oil trade flows, some 30% of EU’s imports will need replacement from other regions, including the Middle East Africa and the United States, Fitch said, adding that Saudi Arabia and the UAE have sustained production spare capacity of about 2 million bpd and 1 million bpd, respectively.
“Russia should be able to redirect some of the displaced volumes into other countries, including India and China, which so far have been increasing Russian oil purchases,” Fitch said. “The use of spare capacity and Russian oil redirection should lessen the pressure on global oil supply in the medium term.”
Russia is profiting from oil prices now.
“With higher crude oil and product prices globally, Russian oil export revenues are estimated to have increased by $1.7 billion in May to about $20 billion,” the International Energy Agency said June 15 in its monthly oil report.
Russian crude exports held steady in May at 5.4 million bpd, but refined product shipments slipped 155,000 bpd compared to April to 2.4 million bpd, the IEA said.
A June 15 S&P Global report said industry observers think the EU insurance ban may not stem the flow of Russian oil at sea as providers in other regions will likely fill the breach.
“There is talk that there could be some Asian entities, perhaps even Chinese insurance providers, to step in, in the absence of EU providers,” a maritime analyst told S&P Global.
The EU insurance ban is a bad idea, the Peterson Institute for International Economics said in a June 9 release.
“It is important to allow Russia to sell its oil - albeit at deeply discounted prices - so that global supply and the world market price remain largely unchanged,” the PIIE said, “In that way, Russia suffers, while Europe and the United States do not.”
In major episodes of oil supply cuts in the past 50 years, a 1% cut in global supply led to increases in world prices of 7% to 10%, and Russian exports account for 8% of world petroleum production, the PIIE said, adding, “If they were reduced to, say, 5%, this ratio would suggest an increase in the world oil price of 21% to 30%, a substantial and costly increase.”