Energy Brief for Apr 4 2022

by Stephen Platt and Mike McElroy

Price Overview

The market continues to be buffeted by a variety of competing influences from both the bullish and bearish perspective. On the bearish side is the release of the Strategic Petroleum Reserves by major energy consuming countries who are part of the International Energy Agency. Biden’s announcement to release up to 180 million barrels over a period of 6 months has helped already ease nearby supply tightness and with other countries expected to act this week, although agreed volumes are still unknown, additional supply availability of as much as .5 mb/d from other members might go a long way at offsetting the loss of Russian supplies during April and May. Some doubts though remain over how quickly these supplies come to market due to capacity pipeline restraints along with the quality of crude in the SPR which is typically sour or heavier crude rather than light blends typically used in the refining for gasoline. Nevertheless, the US release has had a psychological impact as reflected by the sharp contraction in flat prices since earlier this month when talk of a reserve release started to make the rounds along with the sharp contraction in the spread between the nearby crude to the back month contracts. Another bearish factor was the announced two month truce between a Saudi led group and the Houthi group aligned with Iran in the Yemeni conflict. Whether the agreement leads to a longer peace arrangement or renewed efforts to lift export sanctions against Iran in the JCPOA negotiations which appear to have paused; remain to be seen.

Offsetting these bearish forces on values remains the threat from additional sanctions to Russian exports to Europe. Allegations of heinous war crimes in Ukraine appear to be tilting European sentiment to additional sanctions and calls for an embargo on oil and nat gas. An embargo would likely underpin values but also the concurrent decline in economic activity that would result from a tightening in energy supplies would also undercut prospective increases in demand which might already be happening to some extent. In the background is the impact of the sanctions on Russian output levels. It was reported that in March Russian output levels fell to 11.01 mb from 11.06 in February. Reportedly on March 31, production had fallen to 10.6 mb, the lowest rate since September 2021. Cargo cancellations have likely caused additional shortfalls throughout April and into May with declines of as much as 1-1.5 mb/d likely if not potentially low. One needs to recognize that Russian exports to India and China have been unaffected so far and in fact those countries appear to be securing crude cargoes from Russia at discounted rates freeing up other unsanctioned origins to fill European needs.