London Energy Forum: Oil market tensions threaten ‘Goldilocks’ period of price stability

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The stability in oil markets seen over the last 16 months is likely to become increasingly strained amid economic pressure on producers and calls for tougher sanctions against Russia, Dave Ernsberger, head of Market Reporting and Trading Solutions at S&P Global Commodity Insights, said Feb. 26.

Speaking at the Platts London Energy Forum, Ernsberger noted that crude prices, after spiking following Russia's February 2022 invasion of Ukraine, had held within a $75-85/b "Goldilocks" band for Dated Brent and other benchmarks for some 16 months.

Dave Ernsberger on Stage at LEF 24

Audience members polled at the event predominantly forecast Dated Brent to be within a $70-100/b range at the end of 2024. But Ernsberger highlighted "recency bias" as a risk and pointed to potentially disruptive factors. "Strains are emerging at the heart of this 16 months of stability as is always the case" in oil markets, Ernsberger said.

Following the redirection of Russian crude to Asia, "the market has shown amazing resilience… The price measured in Dated Brent numbers and every other benchmark you can think of has actually been relatively steady," he said.

However, he highlighted potential issues including "breakeven" oil costs needed by major producers such as Iraq, Iran and Russia that are thought to be well above recent oil prices, as well as tensions within OPEC+ over countries’ compliance, or not, with quotas -- seen in Angola’s recent abrupt departure from the producer group.

In addition, he noted that the current level of spare capacity in the global market, estimated at around 5 million b/d, may be seen by Russia’s opponents as an opportunity for tougher sanctions.

"We can’t take this environment for granted," Ernsberger said, citing estimates of a Russian "breakeven" oil price of $97/b. "There’s now around 5 million b/d of surplus capacity out there -- that’s roughly equivalent to Russia’s crude export capacity. Not only might some of these countries be thinking about how do we get the price a little higher -- you might also see countries who are dissatisfied with the fact that Russia continues to export barrels, and make revenues, and fund the war in Ukraine thinking the opposite, which is how do we actually maybe cut some of these exports even more dramatically, because we have a supply cushion now, we have a reserve capacity now," he said.

Oil analysts at S&P Global Commodity Insights estimate that Dated Brent will average $83/b in 2024 but soften to $76/b in 2025 as surging non-OPEC+ supplies from the US, Brazil, Guyana, and Canada outpace slowing demand growth.

Benchmark innovation
S&P Global executives at the same event highlighted the conclusion of a multi-year overhaul of flagship North Sea benchmarks Dated Brent and Cash BFOE, which saw the inclusion of US shale oil grade WTI Midland -- for the first time adding a non-North Sea crude as a way of increasing liquidity in the face of output declines.

Stage at LEF 24WTI Midland crude shipments to Europe accounted for around half of overall volumes within the Brent complex in 2023, with the proportion expected to rise further. However, North Sea grades still play an important role, with the UK’s Forties crude acting as the most competitive crude, or demonstrator of price, 70% of the time in January 2024, Vera Blei, global head of established benchmarks at S&P Global Commodity Insights, told the event.

The inclusion of WTI Midland puts the Brent complex "in a place to continue to be the key physical benchmark in the global crude oil markets for decades to come," Ernsberger said, adding that across the spot crude market liquidity is back up after the pandemic and recent inflation spikes.

"We’re now seeing [the Brent complex] with greater liquidity than we’ve seen in a decade, with more participants, new participants, different kinds of oil trading," Ernsberger said.

Blei also pointed to strong liquidity in the Platts Dubai benchmark, with all-time highs in trading of cargo "partials" observed in the Platts Market on Close trading window in 2023, and a record 17.4 billion barrels of trading in derivatives related to Platts Dubai the same year. "Some of that also comes on the back of, for example, Russian Urals crude now flowing more into Asia and being hedged using the Platts Dubai benchmark," Blei added.

Dated Brent was assessed by Platts at $83.72/b on Feb. 23, down $1.81/b on the day.

Platts is part of S&P Global Commodity Insights.


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