Facing what could become the biggest supply crisis in decades, global energy markets are at a crossroads. The Russian invasion of Ukraine has pushed energy security back to the forefront of political agendas as commodity prices rise to new levels. Although it is still too early to know how events will unfold, the crisis may cause lasting changes in energy markets.
The implications of a potential loss of Russian oil exports to global markets cannot be underestimated. Russia is the world’s largest oil exporter, shipping 8 mb/d of crude and refined oil products to customers around the world. The unprecedented sanctions imposed on Russia to date exclude energy trade for the most part, but major oil companies, trading houses, shipping companies and banks have withdrawn from doing business with the country. For now, we see the potential for a 3mb/d shutdown of Russian oil supply from April, but losses could rise if restrictions or public condemnation increase.
Russian oil continues to flow for now due to forward deals and trades made before Moscow sent its troops to Ukraine, but the new business has almost dried up. Ural crude is being offered at record discounts, with limited uptake so far. Some Asian oil importers have shown interest in much cheaper barrels, but for the most part stick to traditional suppliers in the Middle East, Latin America and Africa for most of their purchases.
Refineries, particularly in Europe, are scrambling for alternative supplies and risk having to cut activity just as oil product markets are tight and hit consumers. There are few signs of increased supplies from the Middle East or significant reallocation of trade flows. The OPEC+ alliance agreed on March 2 to keep a modest scheduled production increase of 400 kb/d for April, insisting there is no supply shortage. Saudi Arabia and the United Arab Emirates, the only producers with substantial additional capacity, have so far shown no willingness to tap into their reserves.
Prospects for any additional supplies from Iran could be months away. Talks on a nuclear deal that paves the way for sanctions relief have apparently stalled just short of the finish line. If an agreement is reached, exports could increase by around 1 mb/d over a six-month period. Outside the OPEC+ alliance, growth will come from the US, Canada, Brazil and Guyana, but short-term upside potential is limited.
In the absence of a more rapid increase in production, oil inventories should balance the market in the coming months. But even before Russia’s attacks on Ukraine, the industry’s oil inventories were rapidly depleting. At the end of January, OECD inventories were 335 mb below their five-year average and at eight-year lows. The IEA’s emergency stocks will provide a welcome buffer, and member countries stand ready to release more oil from strategic reserves when needed, on top of the 62.7mb of crude and products already pledged.
The rise in oil and commodity prices, if sustained, will have a marked impact on inflation and economic growth. Although the situation continues to change, we have lowered our expectations for GDP and oil demand in this Report. We now see oil demand growing by an average of 2.1 mb/d in 2022, down about 1 mb/d from our previous forecast. There are actions governments and consumers can take to cut short-term oil demand more quickly to ease tensions, and the IEA will publish recommendations on how to do so later this week. The current crisis comes with great challenges for the energy markets, but it also offers opportunities. Indeed, the current alignment of energy security and economic factors could well hasten the transition away from oil.