[ENG] Oil prices set to increase in September

Short-term price increase

‍The short-term price increase is related to higher gas prices. The rising cost of the latter is boosting oil consumption for power generation, especially in Europe, the Middle East and Asia. The price of Dutch TTF natural gas oscillated around EUR 225per MWh on 8 September, almost USD 380 per barrel of oil equivalent. These kinds of price increases are forcing manufacturing companies to switch to using a different kind of energy . As a result, theIEA raised its forecast for global oil demand. Consumption should increase to 99.7 mb/d in 2022 and101.8 mb/d in 2023 – above pre-pandemic levels.

Increased demand and lower supply

Increased demand should be met with lower supply from OPEC+. The cartel has announced the halting of production increases in Q4. Moreover, Saudi Arabia has led OPEC+ into cutting oil production. The cartel will reduce output by 100 kb/d, reversing July’s symbolic hike. Oil producers are ready to reduce supply further if needed. According to market analysts, OPEC+ is aiming to maintain Brent prices at around USD 100 per barrel.

Trade flows from Russia

The limited price volatility may be related to trade flows from Russia. So far, the decline in Russian supply is lower than in recent forecasts. Russian exports of oil and petroleum products to Europe, the US, Japan, and Korea have fallen by 2.2 mb/d since March.However, Bruegel suggests that Russian exports to non-OECD countries are around six times higher than usual due to shipments to India, China, and Turkey.The IEA notes that, by July, Russian oil production was only 310 kb/d below pre-war levels (-3%), while total exports fell by 580 kb/d (-7%). The supply from Russia may fall more strongly in 2023. The EU embargo on Russian oil imports will leave about 2.3 mb/d of oil products without a buyer. According to the IEA,Russia’s fuel production will fall by 18% in 2023, from11.3 mb/d in Q1 to 9.3 mb/d in Q4.

The use of intervention stocks

The use of intervention stocks may temporarily calm the markets. Industrial stocks in OECD countries are about 290 mb below their five-year average. The IEA forecasts an increase in global stocks of 900 kb/d by the end of this year and 500 kb/din H1 2023. By the end of June, about 150 mb had come on the market, as part of the IEA and its members’ efforts.

The prices forecasts

The price forecasts should be sensitive to news relating to refining capacity. In the US and Europe, 1-2 mb/d of capacity has been shut down since January 2020. Bruegel suggests that Chinese refiners could increase production and exports significantly. China, which has 17% of global refining capacity, is currently limiting exports. Higher crude oil production, without refineries available, is unlikely to result in oil price decreases.

‍

The text was published in CEE Economic Monthly 6/2022 on the 5th of October 2022.