Mon, April 22, 2024

Crude Oil: The supply equation

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In the last few years, crude oil has had a rollercoaster ride. When the pandemic hit the global economy in early 2020 and the world came to a standstill, prices declined rapidly and slumped towards $6.54 per barrel. However, as the global economy recovered and nations gradually opened their borders again, prices jumped towards the $100 per barrel level. Likewise, when Russia declared war on Ukraine, prices reached $130.44 per barrel. Since then, prices have traded a bearish trend and are currently trading at $78.15 per barrel at the time of this article. Given the plethora of factors driving crude oil prices, this article tries to dwell on the supply side of the equation. As the global economy confronts the shortage of Russian crude oil following the EU ban, the volume of US crude oil being exported to Europe has increased in the recent few months and is set to remain high. A general price cap on Russian crude oil has also been imposed by members of the G7 group of economies further complicating the supply situation for European refiners with many turning to alternative suppliers to combat the degrading situation. With US crude oil exports rising, it will partially offset any decline in the Russian crude oil that is sold into the region. The total US crude exports to Europe reached 1.75 million barrels per day in 2022, an increase of around 70% over the 2021 levels. Due to decreasing volumes of crude oil within the current basket of crude oils for Brent, Forties, Oseberg, Ekofisk and Troll (BFOET), the market in the North Sea is facing numerous changes. The production in the North Sea market has been declining since 2016 and there have been numerous attempts to bolster the amount of available crude oil for delivery. As per the latest data from the US EIA and Bloomberg, the total volume of US crude exported to Europe in October 2022 was around 865,000 barrels per day more than the volume loaded at the existing North Sea crude terminals. According to CME Group, trading in the WTI-linked derivatives has been increasing in recent months ahead of the change to include WTI Midland. The contracts have been traded as far ahead as December 2026 for WTI Houston and December 2025 for WTI Midland. An indicator of the success of any contract, the total level of open interest across the Midland and Houston contracts surpassed 300,000 contracts by December 2022. This was an increase of 60,000 lots in comparison to 2021. Doubling the volumes observed in 2021, the total volume of the WTI Midland crude oil futures versus the benchmark WTI futures averaged 52,000 lots per month in 2022. Over the same time, the monthly traded volumes of WTI Houston futures have reached just under 74,000 lots per month, an increase of around 62,000 lots per month in the previous 12-month period. Ahead of the sanctions imposed in December 2022, the volume of Russian crude oil exports to Europe has fallen in recent months. The International Energy Agency (IEA) declared in its November 2022 report that Russian crude oil imports had fallen to 1.4 million barrels per day. Likewise, US crude oil exports to the EU surpassed this level reaching 1.55 million barrels per day based on US EIA data of October 2022. US crude accounts for around 12% of the EU refinery processing volumes, the IEA summarised in its last report of November 2022. Since September 2022, as per the Bloomberg/Bruegel data, the numbers show a sharp decrease in the volume of Russian crude arriving at the ports of European economies. In a move to offset any supply disruptions, European refiners have been increasing the purchase of other crude oil streams and some Middle Eastern exporters have also been able to increase their exports into the region. According to S&P Global Platts, Saudi Arabian exports to Europe mildly increased in 2022. Total exports from Saudi Arabia till October 2022 reached around 600,000 barrels per day, the highest level observed since 2019. European refiners have processed greater volumes of WTI-linked crude oils in 2022 and this pattern is all set to continue into 2023 and beyond. An additional role for WTI means more North Sea crude oil traders and this enlarged market will price either directly or indirectly against it - marking the growing influence of US crude oil around the world. READ ALSO:
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MARCH 2024

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