Oil market report Q2 2022

Key takeaways

1. Turbulence on the oil market persisted in Q2 2022, as the unprecedented geopolitical crisis continued. The demand growth rate for hydrocarbons slowed, due to restrictions in China and a decline in oil consumption as a result of exceptionally high prices. Going forward, oil demand dynamics will be shaped by the global economic environment; in particular, the scale of the impact of tight monetary policies on economic activity.

2. Oil production in Russia fell by 6% or 0.7 mln bbl/d in Q2 2022, due to increased sanctions pressure. Greater production in the US and OPEC countries allowed Russian volumes to be partially replaced. However, there is a deficit in European and US markets, despite the decline in demand. In the near future the global oil supply will depend on a range of factors. First, a lack of necessary transport infrastructure in the East and a ban on Russian oil transportation insurance could trigger an even greater drop in oil exports from Russia. Second, it is not clear to what extent the US and OPEC can replace diminishing volumes. The US is losing interest in the industry, while OPEC countries have neither the desire nor the capacity to substantially increase production.

3. In Q2 2022 the geography of global oil supplies changed significantly. An embargo on Russian fuel from main buyers forced Russian producers to increase supplies to the East, which opened up the European market for Middle Eastern and US oil. On the other hand, competition intensified in the Asian market. Russian oil is a very attractive option for Asian countries, due to the high Urals to Brent discounts: USD34/bbl on average in Q2 2022. As a result, Russian oil exports to Asia via sea doubled in May compared to the previous year, and stood at 60%.

4. The market shock affected oil price dynamics, which were in the USD99-126/bbl range in Q2 2022. Short-term forecasts are characterised by high volatility, with an average value of USD106/ bbl in 2022. In general, price dynamics are influenced by various factors: on the one hand, by demand and a decline risk due to the recession, and on the other – by a possible supply shock due to the introduction of more radical measures for oil exports from Russia. These factors will sustain oil market volatility in the near future. Most experts project that oil prices will stabilise within two-to-three years. The long-term forecast for oil prices has risen insignificantly: by USD4/bbl vs the previous quarter’s forecast, to USD70/ bbl, which may be due to higher inflation expectations.

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