An uncertain outlook for oil supply

The price of oil “whipsawed from a peak of $128 to as low as $98” in a fortnight as the market gyrated between Western sanctions on Russia, China’s Covid-19 surge and uncertainty about new supply from US shale drillers and Opec, says The Economist. Brent crude traded at around $119 a barrel on Wednesday, up by more than 50% this year.

The pullback from recent highs suggests some “speculative froth has blown off” the market, says Liam Halligan in The Daily Telegraph. But note also that “Western energy sanctions, while extremely serious, are not quite as tight as suggested by the belligerent political rhetoric”. It may be “the end of the year at the earliest” before Russian crude stops flowing to the UK and the EU.

Sanctions have caused shipping delays and disruption to global oil markets, says BCA Research. But by May ships will have been rerouted and China and India, keen to snap up Russian energy at a discount, will have put sanctions work-arounds in place. Western policymakers are putting pressure on Saudi Arabia and the United Arab Emirates to boost supply, but this is complicated by the fact that Saudi Arabia and Russia are “strategic partners”, says Daniel Yergin of IHS Markit. “Ever since the price collapse of 2014” Riyadh’s “goal had always been to bring Russia into a [supply] agreement” rather than have it “stand outside as a competitor”.

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US shale producers may raise output, but Western oil producers are reluctant to invest. “The US has been looking for other sources of supply, including possible barrels from Venezuela, which has been under sanctions,” says Patti Domm for CNBC. A nuclear deal with Iran could bring one million barrels per day back onto markets, “but those talks have bogged down in recent weeks”.