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

Banner Image

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.

Tags

  • Conferences

  • Crude

Related content

News

Interactive: Seaborne trade in Russian oil under G7 price cap

(Latest update: June 11, 2024) Russia, one of the world’s largest oil suppliers, has increasingly turned to non-Western firms to transport its crude to overseas buyers during its ongoing war with Ukraine . With a dual goal of undermining Russia’s war chest without creating significant disruptions to global supplies amid inflation pressure, G7 countries and their allies have banned tanker operators, insurers and other services firms from facilitating seaborne Russian crude exports unless the barrels are sold for no more than $60/b. The price cap regime, which came into force Dec. 5, 2022, does not directly cover tankers flagged, owned and operated by companies outside the G7, the EU, Australia, Switzerland and Norway, and not insured by Western protection and indemnity clubs. While such ships tend to be older and less maintained, their share in Russia’s crude exports market has been rising in recent months amid strengthening prices of Urals -- the OPEC+ member’s flagship crude grade -- and tightening sanctions enforcement by the West. Non-price-capped tankers have a larger market share in shipping Russia’s Pacific crude exports, according to analysis of S&P Global Commodities at Sea and Maritime Intelligence Risk Suite data. Crudes such as Sokol, Sakhalin Blend, and Eastern Siberia–Pacific Ocean grades are more often involved in these trades than Russian barrels from Baltic or Black Sea ports like Urals. Tanker operators in Greece, Europe’s top shipowning nation, managed to keep their traditionally strong market position in Russia in the first few months since the price cap took effect before giving ways to their peers in the UAE, Russia, China and Hong Kong. Related content: Interactive: Global oil flow tracker

News

Interactive: Global oil flow tracker

(Latest update June 4, 2024) Recording changes to Russian oil exports and EU oil imports since the war in Ukraine Russia’s war in Ukraine has triggered a major upheaval in the global oil markets, forcing Moscow to find alternative buyers and Europe to source new supplies as Western sanctions seek to clamp down on Moscow’s vital oil revenues. With an EU embargo and the G7 price cap on Moscow's oil now fully in place, Russian seaborne crude exports have remained largely resilient as displaced volumes of its discounted oil flow East. Russian oil product exports have also mostly held up with new buyers in Africa absorbing Russian diesel and other fuels now banned from Europe.

News

Infographic: How will Mexico's presidential elections impact the energy sector?

Mexicans are taking to the ballots on June 2 to elect a new president. Ahead of the election, two female candidates with contrasting views on the energy sector lead the polls. How will these election's impact Mexico's oil, gas and power sectors, which remain largely in the hands of state-owned companies and need funding to meet the country's energy need? Related feature: Choice of next Mexico president almost certain; her energy policy, not so much Click here for full-size infographic

News

Potential record-setting hurricane season is forecast and may weaken energy demand, prices

The National Oceanic and Atmospheric Administration on May 23 projected the most tropical cyclones ever in its early hurricane season forecast, and such storms could weaken energy demand and prices in landfall areas during what may be an otherwise warmer-than-normal summer. In particular, NOAA made the following forecast: 17-25 named storms, up from 14.7 for 1991-2023 Eight to 13 hurricanes, up from 7.2 for 1991-2023 Four to seven major hurricanes, up from 3.2 for 1991-2023 At the high end of the forecast, the season could equal 2020's record seven major hurricanes and approach 2020's record 30 named storms and 2005's record 15 hurricanes. "As one of the strongest El Nino ever observed nears its end, NOAA scientists predict a quick transition to La Nina conditions, which are conducive to Atlantic hurricane activity because La Nina tends to lessen wind shear in the tropics," NOAA said. "At the same time, abundant oceanic heat content in the tropical Atlantic Ocean and Caribbean Sea creates more energy to fuel storm development." Energy market impacts Tropical cyclones making landfall 2021 through 2023 cut peakloads at affected grids an average of 18%, power burns an average of 17%, and power prices -- excluding the Electric Reliability Council of Texas South Hub's extreme case in 2023 -- an average of 38%. ERCOT had one of its hottest summers on record in 2023, so day-ahead on-peak locational marginal prices at the South Hub averaged almost $795/MWh on Aug. 15, the Tuesday before Tropical Storm Harold hit South Texas on Tuesday, Aug. 22, when prices averaged less than $60/MWh. The change was drastic, inasmuch as ERCOT load fell just 1.5% on the week, and natural gas power burn actually increased 10.7%. South Texas has a large wind generation fleet, which may have been taken offline during the storm due to transmission constraints or grid reliability concerns. Grant Gunter, energy markets expert at PA Consulting, said hurricanes "can be a mixed bag for supply and demand" for natural gas. The production impact "used to be the typical thinking for hurricanes," as they would diminish offshore production as platforms shut down and evacuate, Gunter said in a May 23 email. "However, as offshore gas production has fallen and moved more onshore, these impacts have become more muted," Gunter said. "A mild hurricane likely won't impact onshore Gulf Coast production all that much." In contrast, hurricanes can have a big impact on power burn and shut-in LNG exports, Gunter said. The National Weather Service on May 16 forecast enhanced chances – 40% to 60% -- for above-normal temperatures for June, July and August across the US South Atlantic and Gulf Coast. CustomWeather on May 22 forecast temperatures to be zero to two degrees above normal across the region in June. "Power outages naturally reduce power burn demand, which is a significant source of demand in Texas and the Southeast," Gunter said. "LNG facilities, which are situated primarily along the Texas and Louisiana Gulf Coast, will usually halt exports during hurricanes due to rough seas and an inability to bring in tankers to load. These shut-ins can last 3-5 days or more depending on the severity of the storm, and a single LNG facility shutting in can result in 2+ Bcf/d of demand going offline. Ian Palao, vice president for strategic energy services at POWWR, an energy management service, advised considering ERCOT's likely heavy heat-driven power demand, despite the hurricane forecast. "Because of the random nature of hurricane landfall, I wouldn't expect an increased level of forecasted tropical activity to nullify the potential heat risk this far out in time," Palao said in a May 23 email. Hurricanes in the past have affected not only the demand side from reduced load due to system outages but also the supply side, due to reduced offshore production. "I would say hurricanes have more of a demand (gas burn for electricity generation) impact than a supply impact as significant swaths of cities can be off the grid for upwards of a week or more (thinking of Hurricanes Harvey and Ida)," Palao said. "Additionally, given that on-shore gas production far outpaces off-shore production, a temporary shutdown of offshore rigs will be but a blip in total supply." Risk management As of May 22, day-weighted average on-peak power forwards for the 2024 hurricane season, June 1 through Nov. 30, were less than day-ahead on-peak prices at relevant hub in ERCOT, but had premiums in comparison with day-ahead on-peak power in the Southeast and at the Midcontinent Independent System Operator's Louisiana Hub. Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings, a Houston-based interdealer commodity broker, said "over all forward market seems to mostly be pricing in generalized 'heavy load' season prices that have been driven up" by weather-normalized load growth. "From the risk side, there are some very difficult to predict effects of what a major hurricane would do to any of the Southern control districts," Faulkner said in a May 23 email. "Florida is the best equipped to deal with a major strike. Texas? Well the derecho storms that recently rolled through highlight the extreme risk that a Houston-centered major wind event hurricane could cause." Gary Germeroth, a PA Consulting energy market risk management expert, said the location and strength of such storms affect the risk of lost load the most. "The forward markets, even at a near coastal hub months before the hurricane season begins, do not have any information or data that indicates the timing or severity of hurricane landfall, so the incorporation of a long-term forecast like this is interesting data to the market, but not likely a key component of forward price," Germeroth said in a May 23 email. Another risk to consider is the effect on solar installations, which have grown substantially over the past few years along the Gulf Coast, particularly in Florida and Texas. Tulane Energy Institute Associate Director Eric Smith said Florida's "new solar capabilities will be vulnerable to damage from wind-borne debris." "Texas is also vulnerable to wind damage to both solar and wind assets," Smith said May 23. But Derek HasBrouck, PA Consulting's ReliabilityOne program director in a May 23 email that storm tracks from the more active seasons of 2004 and 2005 show the grid and solar installations are distributed widely over the peninsula, such that "any one hurricane, or even several, are not going to make the sort of direct hits required to cause extensive damage." "And, to the extent those installations have associated storage and/or inverters capable of operating islanded from the grid, any installations that are not damaged are useful resources for consumers and/or the utility," HasBrouck said. Effects on oil, gas, LNG The US Energy Information Administration noted that production of crude oil dipped during Hurricanes Katrina and Rita in 2005, Hurricanes Gustav and Ike in 2008 and Hurricane Ida in 2021. Export terminals for liquefied natural gas (LNG) on the Gulf Coast could be in harm's way as well, the EIA said in a May 22 analysis. The US exports about 13 billion cubic feet of LNG daily, mainly through Gulf Coast facilities. "Although LNG facilities generally have many layers of protection from direct impact, hurricanes can damage electrical and marine infrastructure and hamper ship movement," the EIA analysis said. Hurricane Laura in 2020 temporarily halted LNG exports from Louisiana's Sabine Pass and Cameron LNG facilities. All that said, OTC Global Holdings' Faulkner described forecasts for an abnormally active hurricane season are "borderline useless." "Last year was supposed to be horrible and ended up being rather benign," Faulkner said May 23. "Thus the prognosticating and fear mongering is an exercise designed to drive clicks and induce fear in the wider populace." But Faulkner acknowledged that if a hurricane does approach the Gulf Coast, its effect "could be serious, especially given the importance of LNG exports," causing gas prices to "plummet."