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Russia’s invasion of Ukraine upends OPEC’s oil demand forecast; Dallas Fed sees uncertainty

By on March 15, 2022 0

Global oil demand this year was following a strong recovery, fueled by demand for goods and services, but Russia’s incursion into Ukraine has upended all forecasts and there is no near-term clarity, experts say in energy.

In OPEC’s Monthly Oil Market Report (MOMR) released on Tuesday, the Saudi-led cartel noted that this year had started with expectations of a broad global economic recovery by the middle of the month. ‘year.

“The outlook also called for gradual monetary tightening, continued improvement in global labor markets and easing supply chain disruptions,” the researchers noted. “Similarly, global oil demand growth is expected to continue to recover…

“However, while the drag of the pandemic was still being felt in major economies in 1Q2022, the war in Eastern Europe led to a level shift in global economic uncertainty.”

In particular, Russia’s invasion of Ukraine, which began about three weeks ago, has already created “a rise in commodity prices, which is further accelerating global inflation. Additionally, heavily impacted trade flows and transport logistics are offsetting – in part – the gradual easing of global supply chain bottlenecks.

Oil prices were trading below $100/bbl at midday Tuesday. West Texas Intermediate fell to around $96.44, while Brent, the international benchmark, traded above $98.00.

Will the demand for oil go down?

The impacts of the war and in particular the effect of rising inflation could, if sustained, “lead to lower consumption and investment to varying degrees”, OPEC researchers have said. . Financial pressures in currency markets, equities and ongoing debt repricing are also impacted.

“Obviously, this will impact economic activities in 2022, but to what extent exactly remains to be seen,” according to MOMR. “Given the complexity of the situation, the rapid developments and the fluidity of the market, with so far limited data to understand the profound consequences of this conflict, the projections change almost daily, which makes it difficult to identify a unique number with a reasonable degree of certainty.

Due to the uncertainty surrounding the war, OPEC said its forecast for global gross domestic production growth for 2022 of 4.2% “will remain under assessment.” It may be reviewed and adjusted when the geopolitical turbulence becomes clearer.

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Besides the war, OPEC is also monitoring Covid-19 and its continued potential to upend energy consumption levels.

“Indeed, the pandemic has led to some bearish momentum in 1Q2022 in the US, Eurozone and Japan, in addition to the negative consequences in 1Q2022 of the zero Covid-19 policy in China. For now, the pandemic is assumed to be largely contained. Nevertheless, many challenges remain,” such as the potential for viral mutations and the effectiveness of vaccines.

“Looking ahead, and given the latest developments, which are only just beginning to unfold, it is clear that uncertainty will dominate in the remaining months of 2022,” according to the MOMR researchers.

“Given this unprecedented level of uncertainty, the forecast for total global oil demand growth for 2022 also remains under estimate at 4.2 million bpd, until more clarity prevails. In light of these highly volatile times, safeguarding market stability will remain paramount for oil producing and consuming countries.”

Russian crude imports “small” but…

The Federal Reserve Bank of Dallas also weighed in on Russia’s unprovoked war. Dallas Fed researchers, as is well known, noted that the United States recently banned “the small but sizable volumes of Russian crude and petroleum products it imports, most of which are used to increase production of distillates in US refineries.

Imports of Russian crude into the United States in 2021 were estimated at more than 6 million bpd; they reached 6.4 million b/d during the last three months of the year. That level was “almost on par” with pre-pandemic levels, according to the Dallas Fed.

Of total U.S. crude oil imports in 2021, 3.8 million bpd, or 62%, came from Canada, the researchers noted. Around 0.8 million bpd (13%) came from OPEC, with almost half from Saudi Arabia. Another 0.6 million bpd (10%) was imported from Mexico.

“Russian crude accounted for 0.2 million b/d (3%) of US crude imports in 2021,” the Dallas Fed noted. “Many crudes in North America are similar to Russia’s Urals brand, but it’s unclear how quickly their production could increase to replace Russian oil in the near term, if at all.”
U.S. oil from Mars, produced in the Gulf of Mexico, acid from West Texas and some blends of Canadian crude “are viable substitutes, but increase their production enough to compensate for a substantial drop in the availability of Russian crude will take several months.

Commodity imports are larger than Russian crude, the Dallas Fed noted.

“In 2021, the United States imported 354,000 bpd of ‘unfinished oils’ from Russia,” researchers said. “Refiners tend to blend this with lighter crudes to increase their diesel production. Smaller volumes of gasoline blending components, high sulfur distillates and residual fuel oils were also imported.

The estimated 473,000 bpd of petroleum products imported from Russia last year “represented 20% of US product imports”, according to the Dallas Fed. Russia was also “the second largest source of U.S. petroleum product imports last year behind Canada at 583,000 bpd. Even so, the 672,000 bpd of Russian crude and product imports represented less than 4% of the net input volume of US refiners and blenders.

Arab Medium oil is seen as a ‘close substitute’ for Russian Urals, ‘but Saudi Arabia has reported no production increases beyond the quotas imposed on it by the current OPEC deal -more,” the Dallas Fed researchers noted. “Iranian and Mesa 30 heavy crudes from Venezuela are also substitutes with some return capability, but diplomatic efforts, years of underinvestment and operational delays put a substantial increase in these supplies months away at best.”