Alexander Potavin: ‘Oil hasn’t gone up in price for more than three months now’

“North Sea Brent price tag doesn’t have to go above $120 per barrel”

Generally speaking it is logical to see such a picture in the market: since Europe is refusing Russian tanker oil till the end of the year, our oil companies have refocused their sales on India and China. To get local buyers interested in Russian oil somehow, a significant discount (25-35%) on Brent oil price is offered. So Russian oil is driving out the feedstock of producers from the Gulf area from the Asian outlet. These producers, in turn, are increasing supplies to Europe.

It became known last week that the Russian oil price cap G7 members are actively pushing now can be fixed by December. The introduction of the ceiling for Russian oil price means that Russia’s oil will be purchased at a fixed price, which will be considerably lower than Brent’s cost. But there is not a consensus between key countries importing oil on introducing price caps. This is particularly related to such big importers as China and India. Many experts fear that Russia will refuse supplies in case such sanctions are imposed.

Preparing for such a manoeuvre, Europe has doubled oil purchases in Saudi Arabia. According to Bloomberg, the amount of oil pumped into the EU through an Egyptian pipeline has doubled compared to the last year. Iran and Saudi Arabia have incremented tanker suppliers. So the total amount of oil from Near East to Europe could increase from 2,2 million bpd, which is nearly 90% more than before the February events.

As there was such castling between buyers and sellers on a global scale, we see oil hasn’t risen in price for about three months now. Brent has been sold for $95-120 since mid-May. And in the last three weeks, oil prices haven’t gone up above $107 per barrel.

If there isn’t any force majeure, North Sea Brent price tag doesn’t have to go above $120 per barrel. Earlier, oil had high prices from six months to several years. This depended on the demand and supply ratio. Nowadays two opposite factors influence prices: a lack of production capacities and sanctions and, on the other hand, a prospect of the reduction of demand because of the looming recession.

Changes in the situation with oil demand and supply in the world market are possible only by the end of the year

The firm position of world central bank in the recent months has intensified investors and analysts’ fears of a nearing global recession. The concern over the weakening of the world economy that will lead to a fall in oil demand won’t let Brent oil grow in July and is pushing them downwards, despite the signals illustrating a limited supply of energy resources.

However, it isn’t all that bad. In the middle of July, it became known about the Chinese authorities considering a tax and budget stimulation programme for the local economy worth at $220 billion. It can be implemented in the second half of the year to help China to overcome the ongoing crisis in real estate and revive consumer demand that has suffered from a slew of coronavirus restrictions. Against this backdrop, optimism can easily return to feedstock and stock markets.

In its July monthly review, OPEC maintained its outlook for the world oil demand in 2022 at 100,3 million bpd. OPEC’s evaluation of oil demand rose from 29,05 million bpd to 29,16 million bpd. At the same time, OPEC doesn’t agree that oil demand will stop augmenting. According to the current assessment of the cooperation, global oil demand will go up by 3,4 million bpd this year. Its analysts temporarily raised the estimation of oil demand by 200,000 bpd in the third quarter but the outlook for the fourth quarter didn’t change.

The International Energy Agency lowered the evaluation of oil demand in the world to 99,2 million bpd in 2022 to 101,3 million bpd in 2023 in its July report. So in 2022, the IEA expects oil demand to grow by 1,7 million bpd in the world against 1,8 million bpd a month earlier. The evaluation of the consumption growth in 2023 decreased just by 80,000 bpd — to 2,1 million bpd.

In other words, the IEA and OPEC don’t yet expect dramatic worsening in oil demand and supply in the world market. Perhaps, we will see some changes here only by the end of the year when the embargo on Russian oil to European consumers by tanker comes into force, moreover, G7 countries will try to set the price ceiling. It is unclear at the moment if the Russian authorities will dare to aggravate this situation by stopping selling oil if the offered price doesn’t suit them.