Global political and economic directions shifted as soon as Russian President Vladimir Putin ordered the invasion of Ukraine under a “special operations” mission on 24 February 2022.
Over 200,000 Russian soldiers and lots of tanks and armoured vehicles advanced rapidly to attack Kyiv, the capital of Ukraine. The severe damage pushed the price of ICE Brent crude oil up from $90 per barrel to $128 per barrel within a month. However, Ukraine’s strong resistance with modern missiles backed by the West destroyed many Russian warplanes and tanks, causing the war to be prolonged into 2013.
Russia has weaponized energy to counter the West by cutting exports and threatening to halt energy supplies to Europe, causing energy prices to increase. The United States and its allies imposed some sanctions on Russian energy to limit Russia’s war revenues. At the same time, the European Union (EU), the seven leading industrialised nations (G7) and Australia, set a ceiling for the price of oil Russia’s seaborne crude oil at $60 per barrel, effective from 5 December 2022. Shipping companies, maritime oil insurers under the EU and the G7 will only be able to transact maritime transportation of Russian crude oil if the price ceiling is not exceeded.
Although the EU does not set a schedule for sanctions on natural gas from Russia, Russia has already reduced its deliveries to force the EU to make payments in roubles. While the EU accelerates gas reserves to above the 80% threshold of the total storage capacity before 1 November 2022 to meet winter demand. The EU aims to end its reliance on natural gas from Russia and turning to LNG volume from the US and Qatar, and pipelined gas from Norway.
Rising energy prices have caused inflation. Moreover, the supply of grain, of which Russia and Ukraine are major exporters, has been disrupted by the war, exacerbating the energy and food crisis before a grain export agreement was reached in mid-June 2022. Soaring inflation is prompting central banks to step up interest rates. The Federal Reserve (Fed) was set to raise interest rates to 5% by the third quarter of 2022 from the 0-0.25% range. Higher Fed interest rates make the US dollar stronger. In addition, swiftly rising oil prices drained the United States’ Strategic Petroleum Reserve (SPR) due to the U.S. government action to release the SPR around 180 million barrels in the period May-December 2022 in order to relieve domestic gasoline and diesel retail prices for consumers.
The International Monetary Fund (IMF) forecasts global economic growth (GDP) in 2022 at 3.2% compared to 2021. This is a sharp downgrade from its early 2022 forecast of a 3.9% increase. The IMF also revised the world GDP forecast for 2023 to 2.7% as a result of rising interest rates, energy prices and financing costs. These factors increase financial costs to business and reduce corporate profits and consumer purchasing power. On the Chinese side, although the government eased its Zero-COVID measures after mass protests in November 2022, the impact of its epidemic control measures caused China’s crude oil imports to fall by 1.4% year-on-year in January-November 2022, to 10.06 million barrel per day, close to the volume imported in 2020.
The International Energy Agency (IEA) estimates that global oil demand in 2022 will increase by 2.1 million barrels per day over the previous year. This was revised down from the 2022 initial forecast with increase of 3.6 million barrels per day over the previous year. In 2023, global oil demand is expected to increase by another 1.6 million barrels per day to 101.4 million barrels per day higher than 2019 when the Covid-19 outbreak began.
The oil market in 2023 is likely to be highly volatile due to tightening supply after the sanctions on Russian seaborne crude oil started on 5 December 2022. (Sanctions on seaborne refined products will be imposed on 5 February 2023). The Biden administration tries to improve the global crude supply situation by allowing Venezuela to export crude. Venezuela is projected to increase oil production from the current level of 690,000 barrels per day to 720,000 barrels per day in the second half of 2023 which will help to relieve tightening supply conditions.
In 2023, OPEC and its allies (OPEC+) will continue to regulate crude oil production as per the latest agreement on 5 December 2022 (cut production by 2 million barrels per day from November 2022 until the end of 2023) until the next meeting scheduled on 4 June 2023. OPEC+ production for the month of October 2022 staying at 38.47 million barrels per day or about 2 million barrels per day below the production quota.
Stay tuned as the Russia-Ukraine war drags on into winter and the G7, EU and Australia’s oil price ceiling on Russia and rising central bank interest rates around the world produce continual oil price volatility from the remainder of 2022 through 2023.
PRISM analysts estimate Dubai crude oil prices in 2023 to be in the range of $80-90 per barrel.
