Last week, oil prices dropped to their lowest point since late September, as demand concerns rose in the wake of an increase in COVID-19 cases in China. European refiners already started to avoid Russian crude oil as the EU sanctions on it approached. Other factors which prompted European purchasers to avoid Russian oil were the lack of suitable tankers, insurance and protection.
This week, the EU’s embargo on Russian seaborne crude oil went into effect. Price cap-hit Russian oil can still find its way to non-EU markets at lower prices, while the predominantly Middle Eastern flows that once filled global demand could then be redirected to Europe. This, however, would not please Middle Eastern producers, who would lose market share in the growth markets of Asia. On balance, these producers have the opportunity to gain market share mainly in regions which can displace imports with local production (the Americas) or in regions whose oil demand is in structural decline (Europe). Russian oil export could still fall, both by government decision and because of a shortage of available tankers in the coming months, driving global oil prices upwards.
The week ahead, ELS Analysis will be watching for triggers of oil price rises. Easing covid lockdowns in China will possibly increase demand. Russia’s retaliatory measures aimed at increasing global oil prices, are expected to include cuts in oil production, and trade flow effects on supply will be seen with a delay of three to five weeks given the travel time of seaborne cargoes.