As we start the second quarter, it’s worth assessing the main risk factors that may impact the oil market fundamentals over the next few months.

The first risk factor is related to the sanctions imposed on the Russian oil and gas sector amid the recent development in Ukraine. So far, the US has announced that it is banning almost all Russian oil and gas imports, while the UK said that it would phase out Russian imports by the end of the year.

Furthermore, the EU also declared its plans to switch to alternative fuels to become totally independent from Russian imports before 2030. Additionally, Germany has withheld permission for Russia’s Nord Stream 2 gas pipeline to open.
While some of these sanctions will impact the oil market over the longer term, the more immediate setback will be to restrict the sale of more than 2 million barrels of Russian supplies in the short term, increasing the pressure on an already tight crude oil market.

On the other hand, the outcome of ongoing nuclear talks with Iran is a crucial supply factor since an agreement could lead to Iranian crude oil being allowed to enter the market, which would offset the deficit caused by Russia.
The timing of the deal and how quickly Iran can resume production will immediately impact the market sentiment and the short-term price volatility. If given the green light, Iran could resume the production of about 1 million barrels per day, or bpd, of crude oil within a few months of the deal. Next year, it could be back to its full production capacity of about 3.7 million bpd. Therefore, the impact on the oil market may be limited in the short term.

The outcome of ongoing nuclear talks with Iran is a crucial supply factor since an agreement could lead to Iranian crude oil being allowed to enter the market, which would offset the deficit caused by Russia.

Hassan M. Balfakeih

The second risk factor involves the overall economic developments globally. While oil-producing countries will benefit from the current oil price environment, other countries may feel the heat due to escalating inflation rates. Inflation remains a significant risk factor that may jeopardize the recently witnessed recovery in oil demand.

Europe has been facing crippling inflation as fuel and food prices soared. The final inflation data indicate inflation is projected to reach 7.5 percent in March, up from 5.9 percent in February, according to Eurostat, the statistical office of the EU. In the Netherlands and Turkey, annual inflation has reached 12 percent and 61 percent, respectively.
Higher transport fuels’ retail prices may pressure the recovery of transport fuel demand in many countries, such as India and the US, where gasoline consumption is the highest, exceeding 9 million bpd during the summer driving season.

Gasoline retail prices exceeded $4 per gallon in March and the first week of April. Looking at Apple’s mobility index, the data shows that driving activities remained intact in March despite signs of easing lately. However, some negative pressure on oil demand might reign due to inflationary pressure moving forward.
The third risk factor centers on the oil demand, which seasonally eases during the second quarter of the year, promoting refineries to schedule their maintenance activities. In Europe, it also supports refiners in shifting their crude supply away from Russian crude.
According to S&P Global, several European refiners are planning maintenance work during the second quarter. For example, Sweden’s PREEM has replaced Russian crude oil imports with Norwegian and the North Sea crude, while Finland’s Neste ended its Russian crude intake.

The counterbalancing factor is that some Asian refiners plan to increase output to take advantage of high-priced diesel exports to Europe. As European diesel inventories have shrunk after Western sanctions on Russia, some Middle Eastern, Indian, and other Asian refiners are considering increasing crude imports to take advantage of high diesel exports to Europe.
The fourth factor is the resurgence of COVID-19 cases in Shanghai, China, which has led to the city’s total lockdown and disrupted daily life and business operations.
With no clear end to the lockdown policy, the demand growth for industrial and transportation fuels is expected to be lower than expected in April.
China has witnessed significant oil consumption over the past years due to its rapid industrialization and urbanization programs.

The country consumes more than 13 million bpd annually, mainly diesel for the industrial sector and gasoline for transportation. With the current unprecedented lockdown, some pressure is anticipated on the country’s consumption in the short term.
Considering the above uncertain risk factors, the supply and demand situation for the year under review is relatively broad.

If we focus on demand, the year-over-year increase in demand for petroleum products reported by some forecasters, including OPEC and the US Energy Information Administration, in 2022 implies a gap between the highest and lowest forecasts of close to 2.3 million bpd. Let’s monitor these factors heading into the second quarter and assess their impact on the oil market fundamentals.

• Hassan M. Balfakeih is an oil demand specialist and former chief oil demand analyst at OPEC Secretariat