Where is Brent? The bear hopefuls were asking a week ago, as Brent crude had tanked to 12—a month low as the West finalized sanctions on Russian crude. The Covid cases in China fueled the further fire and kept crude oil prices in check. But any bear run even at that point looked highly optimistic and more of a wish, as fundamentals suggested otherwise.
A week later, Brent is back in the $80s and is likely to sustain the run this time around as China’s bad year is coming to an end – and reports from Beijing suggest strong demand will emerge faster than many had expected earlier. Brent crude has regained 8 percent in the last right trading sessions, as the pricing cap on Russian crude seems to now have been well priced in.
The Saudi energy minister’s comments on how apt and inevitable the Opec’s production cut plan was for reducing market volatility – have been taken as a hint of what may be in store when the Opec Plus members meet next in the New Year. Russia is yet to respond to the price cut with a clear-cut strategy, but early reports of Russian exports falling in double digits last month may well pave way for an aggressive policy response.
The winter blast in the US has also led to higher inventory drawings, as stockpiles have dried faster than any December before. Air travel is tipped to breach all previous global records, as jet fuel demand is expected to soar by 15-20 percent come 1H 2023. China has signaled going back to 100 percent normal functioning of urban centers – which are the demand centers, especially in transportation – despite Covid cases continuing to rise.
It is too early to say if Moscow is hurting already, but it surely will start feeling the pinch, should prices not rebound quicker. Agencies have reported Russian Ural crude grades being traded at multiyear lows of $40-50/bbl – even lower than the price cap of $60/bbl. Needless to say, Russian partners in the larger Opec alliance will be keeping a close eye and another decision on production quotas, before the scheduled meeting, cannot be ruled out.
Some of the declines also have to do with China’s slower-than-expected demand resurgence, as urban centers still struggle to return to pre-lockdown times. The protests have fizzled out, which had been tipped as a key bear run trigger by research houses. For now, the Russian price cap and the lack of action from the Kremlin seem to have more weight than improving the situation in China. But this won’t last long, as China (and India) continue to be the driving force of global demand growth.
It would be naïve to think that the Opec Plus group would sit back and watch the oil prices slide. An intervention is very likely, which could be in form of Russia’s standalone decision to lower production or a more collaborated effort from the bloc. Either way, the supply side will definitely come into play, if the imbalance continues.
Mind you, the Opec members have long held the view that oil under $80/bbl could be catastrophic in the longer run. Oil infrastructure is believed to be underfunded and under-invested, and any sustained run of low oil prices would definitely mean there will be balancing from the big players i.e. Saudi Arabia and Russia. Things are only going to get trickier come February, as the European Union will implement a ban on refined product imports from Russia. Expecting Russia to keep playing the waiting game, wouldn’t be wise.