Oil prices slumped more than 7% to $74 on Monday; the lowest price in nearly a year. The immediate culprit was investors’ concerns over the multi-city protests in China. The protest, reportedly the largest in more than 20 years, reminded the world (and Apple) of its supply chain vulnerabilities as a result of China’s continued zero-covid policy. While this development is clearly important, the high spate of volatility bedeviling the oil markets is multi-factorial. This article briefly explains.
After Russia’s invasion of Ukraine, a raft of sanctions was imposed. While some took immediate effect, others were expected to kick in much later. This included a complete ban on the import of Russian oil into the EU, with the UK joining in solidarity with the bloc. The expected kickoff date was December 5th. However, other lighter options, including a below-market price cap on Russian oil imports, were agreed on to help ease the pain on vulnerable EU members. However, less than five days to the kickoff date, EU members failed to reach a deal on an acceptable price cap.
This leaves the door open to a potential full-blown import ban by December 5th, and a ban on all petroleum products by February 2023. In the absence of a last-minute deal, at least 1 million barrels of Russian oil could hit the international markets, further depressing prices. While China and India have happily snapped up Russian oil at steep discounts (up to 40% discount on official prices), there is only so much more oil these countries are able to consume.
Beyond the EU’s upcoming deadline, OPEC members are expected to meet by December 4th to make production decisions. This too throws up significant uncertainty as concerns over the global economy continue while Europe’s Russian embargo looms. On the positive side, a full embargo on Russian export into Europe (estimated at 2 million BPD) would create an artificial demand for crude oil from other sources. This might help spur increased production by OPEC and/or members currently producing below designated quota. Europe would look to the OPEC bloc to help fill the void left by banned Russian supplies, especially in light of the continent’s terrible inflation figures.
However, while a potential European embargo on Russian oil (if price cap negotiations fail) would be good news to OPEC, concerns remain over the midterm prognosis for the global economy. In addition to the Ukraine war, China’s relentless zero-covid policies pose significant supply chain risks for the global economy as Apple’s iPhone production challenges show. Internally, China’s zero-covid policies has stirred popular discontent, with protests springing up across key cities. Whether the protests would die out or maintain its resilience remains an open question. Either way, the IMF has hinted at a possible downgrade of its economic forecast for China. Combined with a gloomy prediction for the US and EU economies, OPEC might tread a cautious path notwithstanding Europe’s decisions.
So, where are the markets headed? The outlook is currently murky. However, crucial upcoming meetings, including OPEC’s and the EU’s, and the decisions reached at these meetings would help provide some semblance of direction for the next couple of months. However, the wild card remains Russia’s war in Ukraine as it enters a bitter winter amidst calls for a ceasefire and/or negotiations. While still slim, a negotiated end to the war (combined with gradual lifting of sanctios on key energy and food exports) would significantly change the prognosis for the global economy. For Nigeria, increased demand for crude oil would be good news. However, as subsidy expense increases, the benefit of this windfall might be moot as the CBN recently explained.