Brent Falls Below $100 as Supply Picture Brightens

Brent oil prices fell below $100 on Monday as traders consider that the world might have adequate supply despite looming sanctions against Russia.

The June Brent futures contract closed $4.30 down at $98.48 per barrel on ICE Futures in Europe. In New York, the Nymex West Texas Intermediate futures contract for May delivery fell $3.97 to settle at $94.29/bbl. Trading volumes were moderate.

The future remains murky but the world has more supply than thought, and oil demand is hurting from strict Covid-19 lockdowns in China, high consumer prices and a slowdown in global economic growth.

Shifting Flows

The EU and Germany in particular are considering banning imports of Russian oil, which would increase the volumes Moscow would need to sell in the global market.

In a major shift of trade patterns, traders now expect that more Russian oil will flow to Asia as Russian producers offer up to $40 discounts to keep their volumes moving.

The question is whether Asian refiners have the capacity to absorb another 1 million barrels per day of Russian oil, as European refiners are shunning spot sales and have vowed not to renew term contracts when they end this year.

Asian refiners look for security of supply and have term offtake commitments that are hard to break.

More Supply

Russian crude exports from its European ports have been holding up better than expected after a US ban and self-sanctioning in Europe disrupted flows following Russia’s invasion of Ukraine in late February.

An estimated 600,000 b/d of spot Urals cargoes have been impacted, but have so far largely found a home thanks to steep discounts, heavy buying by international traders, low-profile trading, and diversion to storage or to Asia.

While Russian crude flows mostly continue, refined product exports took a hit in March and could be down as much as 850,000 b/d, according to shipping data, which is being especially felt in the global diesel and fuel oil markets.

High product prices and the need for European refiners to step up runs are supportive of crude prices. Refinery runs in Russia were down 670,000 b/d in March and are slowing more in April.

Despite the upward pressure, the potential release of 240 million barrels of oil from strategic petroleum reserves has eased some of the pressure in the spot market, and prices spreads show they are better supplied.

Spot Brent prices were trading up to $6 over the front-month futures contract a few weeks ago and are now $1.25 lower than the June contract. Also, the front-month premium over loadings in six months has narrowed to $2.85/bbl from a peak of $19 in March.

Less Demand

The potential for softer oil demand is a key reason for oil prices to relax, analysts say. Russian oil demand is down as sanctions have rattled its economy, and European and US consumers are reacting to higher prices by driving less.

China’s lockdowns have forced domestic refiners to lower runs and allow for higher refined product exports, alleviating tightness in the regional product market.

Some analysts see oil demand growth slipping by 1 million b/d or more on the year, but consumers would still use 2 million b/d more in 2022 than a year earlier as the recovery from the Covid-19 pandemic continues.

Balances in the coming months are muddy, with the market thinking for now that supply will be sufficient. But to maintain crude supply in the coming years, more investment is needed, analysts say, and it could be more costly to pump new oil.

The back of the forward curve in the futures market is expressing that sentiment and has lifted the projected Brent price to $75/bbl in 2027 from less than $60/bbl a few months ago.