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Two Oil Price Scenarios: One Bad, And One Catastrophic
Another day, another record discount for Russian Urals crude, which was offered at a price more than $22 below spot by oil trader Trafigura and still could find no giant…
… confirmed what we previously observed, namely that the commodity world is splitting in two: a bidless market for Russian oil, and (increasingly) offerless for non-Russian.
This is the key point that JPMorgan's commodity strategist Natasha Kaneva makes in a research note earlier today, in which she notes that while the US and its allies have so far stopped short of imposing penalties directly on Russian oil and gas, on Tuesday it became 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 now also an estimated 2.5 mbd loss in oil products loadings from the Black Sea, for a total loss of 4.5 mbd of Russian crude loands, a stunning amount in a market that was already precariously balanced before the Ukraine war.
Putting that number in context, prior to last week 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 US accounted for 4.3 mbd, with Asia and Belarus rounding to 2.2 mbd.
Then echoing what we said yesterday, JPM notes that "as the Russian invasion entered its seventh day on Wednesday, Russian cargoes have become toxic for the majority of the Western trading houses, refineries, utilities, shippers, banks, ports and insurers. As of today, almost 70% of Russian oil is struggling to find buyers."
It should be underscored here that Russia is not withholding volumes: highlighting the difficulty for Russian producers to sell their oil, nine cargoes of 100 thousand tons each for March loading failed to find buyers on Wednesday, after two prior attempts failed on Monday and Tuesday - which explains why as shown above, Russian benchmark Urals oil is now being offered at a record $20 discount to international benchmark, with no bids:
The reasons include logistics, where a large number of oil tanker owners are taking a caution-first approach until the full picture on sanctions is clear. Big international energy consumers are also mindful about reputational damage if they handle Russian barrels. Some have moral objections.
Meanwhile, signs are growing that things will get worse: as Russia’s invasion into Ukraine is entering a deadly new phase, president Biden is facing pressure from lawmakers in both parties to completely cut off US imports of Russian oil and gas. In Europe, the conflict has revealed an extreme tension between European energy security and the region’s primary energy supplier, likely leading to a rethink of European energy strategy where a “Russia-free” requirement might be added to the “carbon-free” category.
As sanctions have widened and the shift to energy security takes on an urgent priority, there will likely be ramifications for Russian oil sales into Europe and the US, potentially impacting up to 4.3 mbd.
JPMorgan then repeats what Goldman said over the weekend, arguing that given the supply shock and barring a breakthrough in peace negotiations, an immediate demand destruction is the only way to rebalance the market in the short term.
In practical terms, this translates into two cases for the future of oil prices: an ugly, painful case which however does not crash the global economy, and a potentially devastating, global recession (if not depression) inducing one. This is how JPM lays them out:
In the first scenario, JPM admits that so large is the immediate supply shock the bank believes prices need to increase to $120/bbl and stay there for months to incentivize demand destruction, assuming no immediate Iranian volumes. This could result in a 1.2 mbd hit to this year’s demand, bringing 2022 oil consumption 550 kbd below 2019 levels.
The far scarier scenario is one where disruption to Russian volumes lasts throughout the year. In that case, 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
https://www.zerohedge.com/markets/two-oil-price-scenarios-one-bad-and-one-catastrophic