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Critical Oklahoma Cushing raises supply concerns, BofA forecasts crude oil at US$200/barrel

Petrochemical industry | 25 Mar 2022 14:27 IST | Polymerupdate.com

After hitting a critical level early this month, crude oil Cushing (inventory) at the benchmark Oklahoma (United States’ largest storage hub) recovered marginally in the last two weeks, giving hope to policymakers of a respite from record high prices, albeit temporarily. But, key supply concerns continued with Russia’s repeated warning of a nuclear attack on Ukraine coupled with United States President Joe Biden’s meeting with the North Atlantic Treaty Organization (NATO) members over ongoing Russia’s military offensive in Ukraine.

Data compiled by the Oklahoma state authority showed crude oil Cushing in the United States’ major oil storage facility declined to hit the lowest in nearly three-and-a-half years at 22.22 million barrels on March 4, 2022, but recovered later to 25.24 million barrels as of March 18, 2022 (latest data available). Such a low level of inventory of early March 2022 was not seen since August 2018. Earlier on August 4, 2018, crude oil Cushing in Oklahoma was seen at 21.80 million tonnes. The Cushing has declined by nearly 15 million barrels since the beginning of this year.

The record fall in the Oklahoma inventory triggered BofA to forecast crude oil prices to rise to alarmingly high levels in the worst-case scenario. According to reports, the BofA’s head of global economics research Ethan Harris forecast crude oil price to hit the record of US$200 a barrel if the United States or NATO move to curb Russian energy exports altogether. Crude oil prices had set their highest record of US$147 a barrel in the peak commodity cycle in July 2008 after supply from Nigeria and Iran halted.

Early March, Goldman Sachs in its report had forecast crude prices to reach US$175 a barrel on supply disruptions from Russia. Also, Moody’s in its latest report has forecast crude oil prices to remain elevated until June 2022 on supply worries. With around 10 million barrels per day (bpd) of output, Russia contributes nearly 11 percent of the global crude oil supply.

Since Russia’s military offensive started over Ukraine in the last week of February 2022, the crude oil supply got badly disrupted. Consequently, crude oil prices jumped rapidly in both spot and futures markets. The Brent crude futures on the benchmark New York Mercantile Exchange (Nymex) jumped to hit the 14-year high record at US$127.98 on March 7 as a knee-jerk reaction to the geopolitical tensions. The Brent crude price for near month delivery later declined to trade at US$98 a barrel towards mid-March this year but gained again to trade at $119 a barrel on the Nymex on Friday. The Brent crude oil prices have risen by 84 percent in the last year.

In fact, crude oil price started firming gradually from its recent low level of US$69.88 a barrel on December 3, 2021, since the war of words began between Russia and Ukraine.

Interestingly, European Union which is heavily dependent upon the Russian energy supply was divided over the ban on energy import from Russia. In a summit of 27 EU leaders held on Thursday, however, unanimously agreed to impose economic and other sanctions on Russia. Meanwhile, Russian President Vladimir Putin has asked the European Union to buy oil and gas in the Russian currency - rubble (instead of the United States dollar) to minimize the impact of the Western countries’ sanctions on it.

Russia supplies a significant volume of fossil fuels to the entire European countries. In 2021, Russia was the largest exporter of oil and natural gas to the European Union, and 40 percent of the gas consumed in the EU came from Russia.

The claims of spiraling prices got stronger with the Organization of the Petroleum Exporting Countries (OPEC) members agreeing to raise production beyond its planned limit of 400,000 barrels per day, which was denied after the March 4 meeting.

Meanwhile, US President Joe Biden’s visit to Poland has raised hopes for a further escalation in tensions between Russia and Ukraine which may take an offensive turn, as the US has stationed around 100,000 soldiers in addition to arms and ammunitions in NATO countries bordering Russia. Amid fear of Russia’s spread of war beyond Ukraine, NATO has also positioned around 40,000 soldiers in its member countries bordering Russia.

Now, coming back to Cushing again, experts believe the current inventory is the minimum operational level which may not be hiked rapidly due to supply disruptions. Since the crude oil-driven commodity inflation has hit the entire world including the United States, the world’s largest economy may use its Cushing inventories for blending at refineries and reduce import quantity.

The remaining parts, however, may be used for a backstop for pipeline oil flows which, under the Western Texas Intermediate (WTI) contract guidelines, may not be used for blending in refineries. This necessarily means the crude oil supply may be tighter than previously believed.

While China signed a long-term contract for crude oil import from Russia, India also has started availing the discount offer from Russian oil companies and has signed a few contracts. Prompted by high crude oil prices, oil marketing companies (OMCs) in India have started raising petrol and diesel prices again in the last few days, after an over four-month of pause.

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