The heat is coming out of the oil market, and fast.
West Texas Intermediate oil futures have shed about 20 percent since closing a week ago at the highest since 2008, dropping below US$100 per barrel yesterday. That followed a tumultuous period of trading that saw prices fluctuate wildly, with intraday swings for global benchmark Brent crude surpassing US$20 per barrel.
The latest developments to rattle the market are a resurgence of COVID-19 cases in China, the world’s biggest crude importer, and what appears to be progress in ceasefire talks between Ukraine and Russia.
Photo: EPA-EFE
While there are still concerns that the disruption to Russian oil flows is squeezing an already tight market, OPEC and others have been quick to say that there is no shortage.
China’s latest COVID-19 outbreak, with growing clusters spawned by the Omicron variant of SARS-CoV-2 in some of its most-developed cities and economic zones, is an unprecedented challenge for the country’s “zero COVID” strategy. The nation injected more funds into the financial system and set a weaker-than-expected reference rate for the yuan, seeking to support the economy.
“Sentiment in commodity markets remains driven by headlines,” said Daniel Hynes, a strategist at Australia and New Zealand Banking Group. “This should see oil prices come under increasing pressure. However, it doesn’t reflect the fundamental picture, with Russian oil becoming increasingly isolated.”
While buyers continue to shun Russian crude, there are signs that exports might not be completely cut off. Surgutneftegas PJSC is offering financing flexibility to some customers to keep crude flowing, while India is working out a mechanism to facilitate trade using local currencies.
Russian oil might end up stored in tankers off nations such as Singapore and Malaysia awaiting buyers, as consumers assess the repercussions of taking the nation’s crude, a PetroChina Co (中國石油天然氣) analyst said.
The heavy criticism leveled at Shell PLC following its purchase of discounted oil from Russia after starting Russian President Vladimir Putin’s invasion of Ukraine highlighted the condemnation that companies face in dealing with energy exports from the OPEC+ producer.
Since then, Shell has vowed to make no new purchases of Russian crude, and buyers have continued to shun cargoes, despite attractively cheap prices.
“People just want to lay low for the moment, while the situation becomes clearer,” PetroChina analyst Royston Huan told a conference hosted by S&P Global Commodity Insights in Singapore.
Tankers with Russian oil could be parked off the city-state, as well as Sungai Linggi in the Malacca Strait, a popular place for stored oil, he said.
Sungai Linggi is an area known for ship-to-ship transfers, where oil is moved from one vessel to another, before being shipped to its final destination. It is often a method used to mask the origin of a particular crude before delivery, such as grades from Iran or Venezuela.
Zhang Jing, senior oil market analyst for China International United Petroleum & Chemical Corp (中國國際石化聯合), or Unipec — the trading arm of the nation’s biggest refiner — told the conference that the company would continue to observe developments around Russia and not be seen as a “reckless company.”
There is speculation that Chinese buyers might be tempted to snap up the heavily discounted crude from Russia.
Some Russia barrels such as Urals are likely to flow to Latin American or regions in Africa’s southwest, Huan said.
The nation’s flagship grade is unlikely to be taken by European users, he added.
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