JPM with the data. It also expects Russian output to fall ahead as European bans advance and a tanker shortage means it can’t ship all of this displaced oil to China and India. I personally think thank the global economy will be reeling in recession before then but, if not, it sure will be shortly afterward!
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Oil prices are searching for equilibrium, stuck in a tight range between $100/bbl and $110/bbl, as weakness in global oil demand and SPR releases even out growing expectations that Europe may agree to curb oil purchases from Russia.
The European Union plans to ban Russian crude oil imports over the next six months and refined fuels by the end of the year. The proposed ban encompasses all Russian crude oil and refined products imports shipped via seaborne and pipeline routes. Hungary and Slovakia will be granted a longer phase-out period—until the end of 2023.
Assuming 200 kbd of Druzhba crude oil pipeline flows to Hungary and Slovakia are carved out, the EU ban would likely target the 3.0 mbd shipped via seaborne routes and an additional 600 kbd shipped via the Druzbha pipeline to Germany, Poland, and the Czech Republic.
Russia, in turn, will try to find alternative buyers for the same barrels. So far, Russia was able not only to fully offset the 1.2 mbd export loss to its traditional customers in the US and Europe, but also increase its sales elsewhere, for a net gain of 200 kbd in total oil exports to record highs. Given time, Russia could likely manage to diversify away another 1.0 mbd of oil flows.
With a shortage in oil tankers limiting alternative export options, the phased ban would still leave global oil markets 1.0-1.5 mbd short, but only toward the end of 2022. By then, global non-OPEC would have time to grow sufficiently to fill some of the Russia-sized hole in global oil supply.
Further stressing the balance, a resumption of the 2015 Iran nuclear deal appears unlikely. We now expect Iranian oil production to remain at current levels, cutting supply by 400 kbd for 2022 and 1 mbd for 2023.
Helping balance the market, global oil demand has weakened considerably. We have revised down global oil demand by 1.3 mbd for March, 2.3 mbd for April, and 1.6 mbd for May with total 2022 annual demand cut by 1 mbd. Furthermore, SPR releases are ramping up to the 1.3 mbd of drawdowns we expect for the next six months and will help ease the impact of supply shortfalls.
Overall, we view a phase-out ban as the right ban. With all these factors canceling each other out, we still expect a balanced market in 2022. We therefore maintain our Brent price forecast of $114/bbl for 2Q22, with prices surging to over $120/bbl in the interim and averaging $104/bbl for 2022.
The main risk to our forecast is Russia’s ability to re-route oil flows sustainably. For the global market to remain sufficiently supplied, Russian crude oil needs to be discounted sufficiently for China to increase its purchases. So tight is liquidity in the oil markets at the moment, that we estimate that the loss of an additional 1.0 mbd could result in oil price surging an additional $18-35/bbl above our price target, potentially lifting oil price to $150/bbl.