Four months ago on March 2022, Natasha Kaneva, Head of Global Commodities Strategy at J.P. Morgan. had this to say, "So large is the immediate supply shock that we believe prices need to increase to $120/bbl and stay there for months to incentivize demand destruction. . ."
Natasha Kaneva, Head of Global Commodities Strategy at J.P. Morgan.
An employee walks across the top of an oil storage tank at an oil field near Salym, Russia.
Source: Bloomberg
"Global oil prices could reach a “stratospheric” $380 a barrel if US and European penalties prompt Russia to inflict retaliatory crude-output cuts, JPMorgan Chase & Co. analysts warned.
The G7 Group of Seven nations are hammering out a complicated mechanism to cap the price fetched by Russian oil in a bid to tighten the screws on Vladimir Putin’s war machine in Ukraine. But given Moscow’s robust fiscal position, the nation can afford to slash daily crude production by 5 million barrels without excessively damaging the economy, JPMorgan analysts including Natasha Kaneva wrote in a note to clients."
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Posted: 5 days ago
RELATED Negotiators want to install a system that limits the flow of money to Russia while allowing oil's availability to large buyers like China and India, in order to avoid further price shocks; the U.S. has suggested applying restrictions on insurance and other services needed to transport Russian oil.
But critics expressed their doubts about the cap doing anything other than exacerbating an already dire situation.
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BACKGROUND 10 March 2022
What Is the Outlook for Oil Prices?
Russia’s invasion of Ukraine has sent energy prices to historic highs, as the conflict has resulted in high market volatility and a coordinated round of sanctions targeting Russia’s economy. J.P. Morgan Research examines the outlook for energy prices as the potential for an ongoing conflict poses potential risks to supply
Updated March 10, 2022
What’s Next For Oil And Gas Prices As Sanctions On Russia Intensify
Global commodity markets have surged to multi-year highs, with oil prices topping $130 per barrel, while natural gas, aluminium and wheat have all hit fresh record highs since Russia’s invasion of Ukraine and the subsequent sanctions that have been imposed on Russia as a result. An extended period of geopolitical tension and elevated risk premiums across all underlying commodities is now expected, with far reaching implications across global commodity markets.
The unfolding conflict has vast implications and J.P. Morgan Research has revised commodity price forecasts up 10-20% across the sector. Russia's impact on the global energy balance is meaningful, with even the U.S., a major gas and oil producer, importing Russian crude and Liquid Natural Gas (LNG) cargoes to meet its consumption needs. In this report, J.P. Morgan looks at how geopolitical tensions could impact oil and gas prices in the months ahead."
With a 12% market share, Russia is also one of largest global oil producers. Almost half of Russia’s oil and condensate exports are directed to Europe.
China is the single-largest importing country of Russia’s crude oil, accounting for almost a third of the country’s oil exports.
Russia's oil exports are transported via Transneft's pipeline system that connects Russian oil fields to Europe and Asia. With its 1.5 mbd (million barrels per day) Druzhba pipeline supplies Russian oil to European refineries in Poland, Germany, the Czech Republic, Hungary and Slovakia via Belarus and Ukraine.
U.S. imports about 600-800 kbd (thousand barrels per day) of Russian oil, which mainly consists of fuel oil feedstocks and some crude.
Russian oil imports, as a share of U.S. total oil imports, hit a record high of 10% in May 2021, according to data from U.S. Energy Information Administration, up from 4% in 2008. The rise in Russian imports coincided with the imposition of U.S. sanctions on Venezuela in 2019, as U.S. refiners looked to replace some of their heavy oil supplies that were lost by other sources.
While the U.S. and its allies have so far stopped short of imposing penalties directly on Russian oil and gas, it has become increasingly clear that Russian oil is being ostracized. The preliminary Russian crude oil loadings for March revealed a 1 mbd drop in the loadings from the Black Sea ports, 1 mbd drop from the Baltics and 0.5 mbd drop in the Far East. In addition, there is an estimated 2.5 mbd loss in oil products loadings from the Black Sea, for a total loss of 4.5 mbd.
Up until recently, Russia was exporting about 6.5 mbd of oil and oil products, with two-thirds clearing through the now-frozen seaborne market. Out of that, Europe and the U.S. accounted for 4.3 mbd, with Asia and Belarus rounding to 2.2 mbd. As the invasion persists, almost 70% of Russian oil is struggling to find buyers. So far, Russia is not withholding volumes. However, Russian producers are facing difficulties selling their oil, with Russian benchmark Urals oil being offered at a record $20 discount to international benchmark, with no bids.
“So large is the immediate supply shock that we believe prices need to increase to $120/bbl and stay there for months to incentivize demand destruction, assuming no immediate Iranian volumes,” said Natasha Kaneva, Head of Global Commodities Strategy at J.P. Morgan.
This could result in a 1.2 mbd hit to this year’s demand, bringing 2022 oil consumption 550 kbd below 2019 levels. If disruption to Russian volumes were to last throughout the year, the Brent oil price could exit the year at $185/bbl, likely leading to a massive 3 mbd drop in the global oil demand. Key to this significant upside is the assumption that even if shale production responds to the price signal, it cannot grow by more than 1.4 mbd this year, given labor and infrastructure constraints.
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