High energy prices, Asian markets could blunt EU ban on Russian oil
The European Union’s groundbreaking decision to ban nearly all oil from Russia to punish the country for its invasion of Ukraine is a blow to Moscow’s economy, but its effects may be blunted by rising energy prices and other countries willing to buy some of the petroleum, industry experts say. European Union leaders agreed late Monday to cut Russian oil imports by about 90% over the next six months, a dramatic move that was considered unthinkable just months ago. The 27-country bloc relies on Russia for 25% of its oil and 40% of its natural gas, and European countries that are even more heavily dependent on Russia had been especially reluctant to act. European heads of state hailed the decision as a watershed, but analysts were more circumspect. The EU ban applies to all Russian oil delivered by sea. At Hungary’s insistence, it contains a temporary exemption for oil delivered by the Russian Druzhba pipeline to certain landlocked countries in Central Europe. In addition to retaining some European markets, Russia could sell some of the oil previously bound to Europe to China, India and other customers in Asia, even though it will have to offer discounts, said Chris Weafer, CEO at consulting firm Macro-Advisory. Now, for the moment, that’s not financially too painful for Russia because global prices are elevated. They’re much higher than last year, he said. So even Russia offering a discount means that it’s probably selling its oil for roughly what it sold for last year also. He noted that India has been a willing buyer and China’s certainly been keen to buy more oil because they’re both countries who are getting big discounts on global market prices. Still, Moscow has traditionally viewed Europe as its main energy market, making Monday’s decision the most significant effort yet to punish Russia for its war in Ukraine. The sanctions have one clear aim: to prompt Russia to end this war and withdraw its troops and to agree with Ukraine on a sensible and fair peace, German Chancellor Olaf Scholz said. Ukraine estimated the ban could cost Russia tens of billions of dollars. The oil embargo will speed up the countdown to the collapse of the Russian economy and war machine, Foreign Minister Dmytro Kuleba said. Ukrainian President Volodymyr Zelenskyy said in a video address that Ukraine will be pressing for more sanctions, adding that there should be no significant economic ties left between the free world and the terrorist state. Simone Tagliapietra, an energy expert and research fellow at the Brussels-based think tank Bruegel, called the embargo a major blow. Matteo Villa, an analyst at the ISPI think tank in Milan, said Russia will take a pretty significant hit now but cautioned that the move could eventually backfire. The risk is that the price of oil in general goes up because of the European sanctions. And if the price goes up a lot, the risk is that Russia starts to earn more, and Europe loses the bet, he said. Like previous rounds of sanctions, the oil ban is unlikely to persuade the Kremlin to end the war. Moscow seized on the new sanctions to try to rally public support against the West, describing it as bent on destroying Russia. Dmitry Medvedev, the deputy head of Russia’s Security Council who served as the country’s president, said the oil ban aims to reduce the country’s export earnings and force the government to scale down social benefits. They hate us all! Medvedev said on his messaging app channel. Those decisions stem from hatred against Russia and against all of its people. Russia has not shied away from withholding energy to get its way. Russian state energy giant Gazprom said it is cutting off natural gas to Dutch trader GasTerra and Denmark’s Oersted company and is also stopping shipments to Shell Energy Europe that were bound for Germany. Germany has other suppliers, and GasTerra and Oersted said they were prepared for a shutoff. Gazprom previously stopped the flow to Bulgaria, Poland and Finland. Meanwhile, the EU is urging other countries to avoid placing trade barriers on farm products as Russia’s war increases the risks of a global food crisis. Zelenskyy has said Russia has prevented the export of 22 million tons of Ukrainian grain, much of it meant for people across the Middle East and Africa. He accused Moscow of deliberately creating this problem. Russian oil delivered by sea accounts for two-thirds of the EU’s oil imports from Moscow. In addition to the EU cutoff of such imports, Germany and Poland have agreed to stop using oil from the northern branch of the Druzhba pipeline. Agreeing on sanctions against Russian natural gas is likely to prove much tougher because it represents a larger percentage of Europe’s energy mix. “The very loud and clear message that Moscow will hear is that it will be near impossible for the European Union to get any agreement on blocking gas because gas will not be as easily replicated from other sources in Europe as oil will be, Weafer said.
Rising Energy Prices Could Tip World Into 1980s-Style Recession
Rising energy prices and boxing Russian crude oil out of the global market risks a global recession, Bank of America’s head of global commodities and derivatives research Francisco Blanch warned in a recent research note. “Can the global economy continue to expand with tightening oil supplies? Our estimates suggest that the world can handle a total disruption of just about 2mn b/d of Russian oil without risking a global recession,” the note cautioned. In 2023, BoA sees oil demand approaching pre-Covid levels—but only if Russia’s crude oil and condensate production stays at 10 million bpd and OPEC+’s crude oil output increases. “With our $120/bbl Brent target now insight, we believe that a sharp contraction in Russian oil exports could trigger a full-blown 1980s style oil crisis and push Brent well past $150/bbl,” Blanch added. Blanch stressed that while recession risks were elevated, it was not the base case. Blanch’s prediction, however, was made prior to the EU’s deal that it recently struck to embargo 90% of the crude oil that it currently gets from Russia starting the end of this year. Some industry experts expect the partial EU ban on Russian imports to send oil prices to above $130 a barrel in the short term. GDP has typically been measured by looking at the number of cars sold or air travel. But, Blanch says, “No major economy can expand without energy. Whether the source of this energy is thermal or renewable matters less, in our view, as long as it is available.” Blanch also said that while the U.S. is unlikely to fall into a recession due to high energy prices, other countries may be more at risk.
Where Are Oil Prices Headed?
Energy prices are top of mind for most people now. From a couple of years ago when fuel prices were low, the rapid rise has helped put a crimp on the economy and raised driving costs for retail consumers. The signs of this rise are everywhere as service station operators adjust prices higher on an almost daily basis. The national average for 87 octane gasoline has reached $4.50 a gallon for the first time ever. Diesel is nearing $6.00 per gallon and raising shipping costs for everyone. In an OilPrice article a couple of weeks ago, I discussed why we were seeing these steep rises in retail prices for refined products. At the core of the problem lies inflation caused by massive increases in liquidity by the Federal Reserve, to pay for the trillions of dollars spent by the government, during and post Covid-19. This article will discuss some likely next steps for the economy with potential knock-on effects on crude prices globally. Inflation and excess liquidity will create a deep recession Since 2008 interest rates have remained near zero, as the Federal Reserve injected liquidity into the economy by keeping the institutional rate low, and pumping its balance sheet, buying corporate bonds. This never-ending reserve of liquidity had the knock-on effect of inflating the value of real property and stocks in particular. There is a fair amount of evidence tying these two actions together. We all know what has happened with house prices, gaining each year since, and rallying by double-digits the last couple. The stock market-DOW 30, has nearly sextupled in that time rising from around 6,000 in early 2009 to just over 36,000 this year. Obviously, there have been fits and starts along the way but the chart shows an inexorable path higher in this time frame. Inflation that should have been attendant to this liquidity was kept at bay largely through increases in productivity and a global supply chain that hummed like the well-oiled machine that it was, until the global Covid shut-in, in March of 2020. Since that time the world has injected trillions in liquidity into the marketplace at a time when supply is still restricted from its default manufacturing center-China. Accordingly, the “dogs” of inflation have been let loose upon the world and in response, Central Banks are beginning to tighten the reins to relieve the demand pressure. This is a textbook case for recession. Or perhaps the first step toward a depression. Most of the conversation around the effects of tightening monetary policy has shifted away from “if” and toward will the landing be Hard, or Soft. Economist-speak for a deep, prolonged recession in the hard case, or a shallower, shorter downtrend, with a sharp spike higher in a few months, in the soft case. A “V” shaped recovery that has enabled the world economy to rebound with few lasting effects in the past couple of times. The notion that we can avoid a “hard fall” as the current Fed Chm, Jerome Powell seems to think possible is the subject of much debate. And, he has recently moderated this tone as noted in the linked article. I would call your attention to the tightening cycle of 2004-2007, which precipitated the recession of 2008-2010, and the tightening cycle of 2015-16, which was interrupted by the Covid crash of 2020. My takeaway from this chart is that we had a false crash in 2020 led by a dramatic reduction in demand due to the world shutting down for three months. You can see the slope of the rebound since then is very similar to the years of 2009-2011 when the Fed was rapidly adding liquidity, as happened in 2020 to early 2022. That suggests to me that as a function of Fed tightening, we may have seen the cycle peak, and the oil price could be in a plateau for the next several years, as in 2011-2014, or until an inflection in the market similar to what Saudi did in 2014 occurs. That is certainly one outcome that we could see, but there are other forces at play in this equation. What’s different this time? As I noted in a recent OilPrice article on problems in the Shale-Patch, supply, and the expectation of the market that oil will be readily available, is out of sync with the demand picture. A look at the EIA-STEO for that time period shows you the beginning of the U.S. inventory build that culminated in mid-2017. From a peak in mid-17 of ~550 mm bbl, thanks to growing U.S. production, and bountiful Saudi exports in that era, the oil market was over-supplied and prices suffered. Drilling in the U.S. had been on the decline starting in 2019, dropping about 300 rigs over the course of that year, when the Saudis and the Russians formed OPEC+ and began to withdraw crude from the market to raise prices. Thanks to a surge of production from newly completed wells, we reached another near peak capacity level in 2019, as this SP Global article notes. Flash forward to today, and as of the most recent EIA-WPSR, we are bumping around 420 mm bbl currently. Hence the case can be made that as a combination of fiscal restraint in the post-2019 era, and OPEC+’s voluntary withdrawals, the strategy to raise prices, by reducing supply has been pretty successful. This decline in supply meets rapidly rising estimates for demand, as noted in this OilPrice article. The article also notes that OPEC+ is unlikely to raise production beyond its stated goal of 432K per month. As they are currently ~2-mm BOPD under quota, it is questionable whether they have the capacity do if they were inclined. Supporting that notion is their commentary in this OilPrice article. The article notes that the cartel is in significant arrears of its agreed production targets. “While OPEC+ is sticking to its policy of modest monthly increases, many of its members are not pumping to their quotas and the group
Gas prices: as cooking fuels become more expensive, people are turning to dirtier alternatives
One consequence of the meteoric rise in the price of fossil gas has been that cooking meals is now much more expensive. In the UK, food bank users declined potatoes as they couldn’t afford to boil them. In Germany, increased heating and petrol costs have even forced some food banks to suspend their services. In low and middle-income countries, over 2.5 billion people cook with liquefied petroleum gas (often abbreviated to LPG). This is a byproduct of fossil gas extraction that is compressed into cylinders for distribution. The price of LPG has also increased sharply in recent months, which has led to fewer people using it for cooking. Sudden price changes in LPG typically see households revert to cooking with more polluting alternatives, such as wood and charcoal, which can be gathered for free or bought in small amounts. A Nigerian news article published in December 2021 described a woman who started cooking with gas two years ago but has since returned to using charcoal as LPG prices have soared. In India, rising LPG prices coupled with the scaling back of a government programme to subsidise cooking gas are forcing people to use firewood. This has also been documented in Rwanda, Brazil, Vietnam and Kenya. COVID-19 lockdowns at the start of 2020 had already pushed many poorer households around the world into using wood or charcoal due to fuel shortages and a loss of income as businesses were closed and people were urged to stay home. Women and girls tend to suffer the most when LPG becomes unattainable, as they are usually responsible for gathering firewood. The task can take up to several hours a week and it prevents many from attending school or work. Burning wood and charcoal for cooking also exposes people to dangerous levels of indoor air pollution in kitchens. It is estimated that this causes four million premature deaths each year, out of the more than three billion people exposed. Cooking with wood and charcoal is also a problem for the climate, as it emits potent greenhouse gases like black carbon. But the consequences of high cooking fuel prices don’t end there. Food and energy are closely linked People in the poorest parts of the world tend to consume very few processed foods and lots of staple foods, such as dried beans in East Africa, which cannot be eaten raw. Because they must cook most of their meals to eat, people in low-income countries typically require more energy to prepare a meal and face a difficult choice between paying for food or fuel when LPG becomes more expensive. It has been reported that a combination of rising gas and food prices has forced families to eat fewer, lower-quality meals in Sri Lanka and Vietnam. This same pattern emerged when COVID-19 restrictions were implemented in 2020, and an inability to afford cooking fuels restricted access to adequate food in both high and low-income countries, including Kenya and the US. Having to skip meals because of unaffordable fuel not only leads to malnutrition but also worsens physical and mental wellbeing.
Petrol Bunk Owners Observe ‘No Purchase Day’
About 150 petrol bunk owners, under the banner of Federation of Mysore Petroleum Traders (FMPT) and Akhila Karnataka Federation of Petroleum Traders (AKFPT) staged a ‘No Purchase’ protest in front of the oil company depots in city this morning. The protestors accused the State-run oil companies such as Indian Oil Corporation Limited, Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited of reducing fuel prices by cutting excise duty during weekends, which has resulted in huge losses to them and also for not increasing the dealer margin. Speaking to media persons, AKFPT State President Basavegowda said that the oil companies give loads during weekends that too on credit when excise duty on petrol and diesel are being reduced, but will not give loads when there are chances of hike in fuel prices, thus putting them into huge losses. He said that people need not panic and resort to panic purchasing of fuels as there is enough stock for three days. AKFPT General Secretary Ranjith Hegde, speaking to Star of Mysore said that the recent reduction in fuel prices had a huge impact on petrol bunk owners, who have suffered a minimum loss of Rs. 3,50,000 to Rs. 2.5 million depending on the individual bunk storage capacity. Pointing out that one petrol bunk purchases 20,000 litres each of petrol and diesel on Saturdays as there will be no supply of fuels on Sundays, Ranjith said that petrol which was sold at Rs. 110 per litre was reduced to Rs. 101 causing a loss of Rs. 9 per litre. This has resulted in a loss of Rs. 1,80,000 to the dealer, who had purchased 20,000 litres from the depot. Similarly, diesel, which was sold at Rs. 94 per litre was reduced to Rs. 87 per litre resulting in a loss of Rs. 7 per litre and Rs. 1,40,000 for 20,000 litres. In total, one bunk owner has suffered a total loss of Rs. 3,20,000. Other petrol bunks with more storage capacity have suffered more losses, he said. “We are not against reduction of fuel prices, but we are against reduction of fuel prices during weekends (Saturdays) that too when we have purchased more stocks as we do not want to inconvenience fuel consumers during holidays,” he added. Added to this, the dealer margin has not been increased since August 2017, despite the Committee, consisting of Petroleum Ministry officials and others, recommending enhancing dealer margin twice a year. “It has become very difficult for us to maintain and manage petrol bunk and staff with very less dealer margin. We hike the salaries of the staff every year, pay more taxes each year and even power bills. But with dealer margin not increased since 2017, it is becoming near impossible to maintain the bunk,” Ranjith added. He said that the oil companies should reimburse the losses suffered by bunk owners and also increase the dealer margin, which are two major demands. FMPT President Shashikala, Manjesh, Lokesh and others were present.
India shows no sign of slowing its purchase of Russian oil
India’s appetite for cheap Russian oil is swelling, even as the West continues to hit Moscow with unprecedented sanctions. Russian Crude flows to India are expected to reach 3.36 million metric tonnes in May, according to estimates from Refinitiv. This is nearly 9 times higher than the 2021 monthly average of 382,500 metric tonnes. Overall, the country has received 4.8 million metric tonnes of discounted Russian oil since the Ukraine war started, Refinitiv added. Urals oil from Russia currently trades at about $95 a barrel, while the global benchmark Brent crude is above $119 a barrel. Part of the reason for the price disparity: The West has shunned Russian oil. On Monday, the EU agreed to ban 90% of Russian oil imports by the end of the year. Europe is the biggest buyer of Russian energy. The United States, Canada, United Kingdom and Australia have already banned imports. The embargo from a huge importer like Europe would pile pressure on the Russian economy, but Moscow has found other buyers in Asia. India, which imports 80% of its oil, usually buys only about 2% to 3% from Russia. But with oil prices shooting up this year, the government has steadily increased its intake from Moscow, taking advantage of the heavy discounts. According to Refinitiv, Russia crude flows to India soared to 1.01 million metric tonnes in April from 430,000 metric tonnes in March. India’s Ministry of Petroleum and Natural Gas did not immediately respond to a query on the impact EU’s partial ban will have on the South Asian economy’s oil ties with Moscow. Earlier in May, India played down the import spike. In a statement, the Ministry of Petroleum and Natural Gas said the country imports oil from all over the world, including a significant volume from the United States. “Despite attempts to portray it otherwise, energy purchases from Russia remain minuscule in comparison to India’s total consumption,” the ministry said in a statement. “India’s legitimate energy transactions cannot be politicized,” it added. The world’s biggest democracy has refrained from taking a tough stance against Moscow over the war in Ukraine. Russia and India have a long history of friendly relations, which stretch back to the Soviet era when the USSR helped India win its 1971 war with Pakistan. India isn’t the only Asian giant buying Russian oil. China, historically the single biggest buyer of Russian oil, is expected to go on a shopping spree, too. OilX, which uses industry and satellite data to track oil production and flows, found that China’s imports from Russia by pipeline and sea rose by 175,000 barrels per day in April — an increase of about 11% over average volumes in 2021. Seaborne imports are rising more sharply in May, according to early data. Demand is expected to pick up as the world’s second largest economy begins loosening its strict Covid-related restrictions in major cities. EU moves ahead with partial ban While Asia’s purchase of Russian crude is surging, the EU on Monday resolved to block most of it by the end of this year. Russian crude accounted for 27% of the bloc’s imports in 2021, according to Eurostat. Russian oil delivered by tankers would be banned, while an exemption will be made for the southern segment of the Druzhba pipeline, said Ursula von der Leyen, president of the European Commission, in a press conference. The northern segment of the pipeline serves Poland and Germany — who have agreed to the embargo. The southern part goes to Hungary, Slovakia and Czech republic and accounts for 10% of imports of Russian oil. After the embargo, Moscow may look for new customers more aggressively, but it won’t be easy. A significant portion of Russia’s oil exports to Europe travel to the bloc via pipelines. Rerouting those barrels to markets in Asia would require costly new infrastructure that would take years to build.
ONGC sees oil production rising 11%, gas jumping 25% by FY25
Reversing the declining trend of the past few years, ONGC said its crude oil production will rise 11 per cent and natural gas output will jump 25 per cent after newer discoveries in the western and eastern offshore start producing. In an investor presentation post FY22 earnings, Oil and Natural Gas Corporation (ONGC) said crude oil production will rise from 19.545 million tonnes in the financial year ended March 31 (2021-22) to 19.88 million tonnes this year and 21.588 million tonnes in the next year. The output will climb to 21.701 million tonnes in 2024-25 (FY25) Similarly, gas production will rise from 20.907 billion cubic meters in 2021-22 to 21.097 bcm in current fiscal and 24.387 bcm in the next. In FY26, the output will reach 26.124 bcm. The output increase will be aided by projects to bring gas, found on both the east and the west coast. ONGC is betting on discoveries in KG-DWN-98/2 in the Bay of Bengal to do most of the heavy lifting, while the Cluster-8 marginal fields in the western offshore will supplement the production. ONGC said it is also implementing the fourth phase of the redevelopment of the Mumbai High oil and gas fields, which will increase the recovery factor from the five-decade-old mature fields. India’s dependence on imports to meet its crude oil needs has, in recent years, risen to 85 per cent as output from domestic fields continued to decline. ONGC, the biggest crude oil and natural gas producer in the country, has over the years seen a steady decline in production from its mature and aging fields. But the firm is now stepping up on exploration campaign to find more reserves. ONGC said it will spend Rs 310 billion from 2022 to 2025 on the exploration campaigns throughout the country. It is in a view to “add around 1,00,000 square kilometers of new exploration area annually up to 2024-25,” the firm said, adding, “increase of acreage holding likely to further establish the resource potential of undiscovered plays and realisation of YTF (yet to find) reserves.” This is a part of the company’s Vision 2040 that calls for raising capacities and production across its portfolio of oil and gas exploration and production, downstream oil refining and petrochemicals and new energy businesses. The company, which started with an equity infusion of Rs 3.43 billion by the government more than six decades back, has generated a wealth of over Rs 9000 billion since then, and is now venturing on a new road to further enhance value. The new Energy Strategy 2040 aims to raise domestic production from 50 million tonnes of crude oil and oil equivalent gas to 70 MMtoe (Million Metric tonne of oil equivalent) by 2040, the presentation said. Overseas output is seen rising from 15 MMtoe to 40 MMtoe. With 35 million tonnes per annum of oil refining capacity vested in its two subsidiaries — HPCL and MRPL, ONGC is targeting to raise this capacity to around 100 million tonnes by 2040. Also, expansion in petrochemicals will be prioritised. ONGC is also looking to scale up its renewable energy portfolio to 10 Gigawatts from less than 200 MW currently. Also, the firm has set up a USD 1 billion venture fund corpus for the incubation of new technologies that will aid in raising the output and finding newer resources, the presentation said.