19 Aug. 2022, Daily Observer (Oman)

By Sudeep Sonawane

Is the world’s energy crisis tottering towards a bad-to-worse position? Oil market experts say this based on recent data. They point to the exodus of investors and hedge fund managers from crude oil markets over the last few months. Oil price volatility petrifies investors, even speculators, analysts say.

Trading in oil markets currently remains at a seven-year low. Investors have gradually exited because they cannot cope with daily price swings. For instance, Brent crude futures’ daily swings range around $6 in recent months. Although Brent crude futures fell $1.45, or 1.5 per cent, to $98.15 a barrel, and US West Texas Intermediate (WTI) crude fell $2.25, or 2.4pc, to $92.09 a barrel. Both future contracts gained more than 2pc% last week.

Consumers felt the impact of price swings. According to the International Air Transport Association jet fuel price ended last week up 8.0pc at US $138.5 per barrel and Index Value at 378.59. In the same period, Middle East and Africa region's share was 7pc ($132.17 per barrel) in World Index while North America's share in World Index was 39pc ($140.24).

Organization of the Petroleum Exporting Countries’ [OPEC] Senior Oil Price analyst Yacine Sari Ahmed shows cautious optimism in her commentary ‘Crude and product price movements’ published by the group last Thursday.

Global oil market fundamentals continued their strong recovery to pre-COVID-19 levels for most of the first half of 2022, although signs of slowing growth in the world economy and oil demand have emerged, she writes. Global oil supply has risen steadily this year amid their continuing efforts to stabilize the oil market. The current low overall investments in the upstream and capital discipline are limiting non-OPEC oil supply growth potential.

The author remains on the same page as other experts when she writes, “elevated price volatility dominates oil markets since March 2022”. She cites the ongoing Russia-Ukraine War, and afterwards, the oil sanctions clamped against Russia led by the US, European Union [EU] and other countries. The sanctions have “sharply raised the risk premium in oil prices, particularly for Brent”.

Washington-based Centre for Strategic and International Studies’ Energy Security expert Edward Chow writes, “It is not possible to restrict exports from one of the world’s largest exporters[Russia] of oil and gas combined without serious impact on the global market, since there is simply no equivalent spare capacity elsewhere or strategic stock drawdown available.”

Energy earns half of Russian central government revenue and most of the country’s export earnings. This year Russia exported over 8.2 million barrels of oil  a day, up from around 7.8 million barrels daily recorded in 2021. Russia’s highest oil export volume of nearly 9 million barrels daily was in 2017.

Russia is the biggest exporter of oil and oil products to the EU, supplying 2.2 million barrels  a day (bpd) of oil and 1.2 million bpd of oil products, according to the International Energy Agency (IEA). EU Foreign Affairs and Security Policy High Representative Josep Borrell Fontelleshas said “oil exports provide Moscow with $1 billion a day”.

The price volatility contributed to reduced market liquidity, as seen in declining open interest. Combined futures and options open interest in ICE Brent and NYMEX WTI dropped in July 2022 to the lowest since June 2015.

Significant changes in interregional trade movement have raised concerns about physical oil supply. This increased pressure on oil markets in some regions, specifically Europe. The fallout being crude differentials soaring to record-high levels in the second quarter of this year.

Oil markets fundamentals remain strong, experts concur. However, one catalyst to the price swings in futures’ markets hinged on lower global GDP growth forecast. They point to the high inflation rates that compelled central banks to raise interest rates. Another reason for the impact on markets was dollar gaining against major currencies.

For the second half of 2022, as oil exporting countries continue to watch market trends, the hope would be to win investors’ confidence and spur investments. The focus would be “to ensure adequate level of capacity in the value chain in the upstream branch to maintain a stable oil market balance for producers and consumers,” concludes Yacine.

[Sudeep Sonawane, an India-based journalist, has worked in five countries in the Middle East and Asia. Email: [sudeep.sonawane@gmail.com]

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