Since Russia’s invasion of Ukraine, oil prices have returned to their most consistent gains since Russia’s invasion of Ukraine as a fuel supply crunch has added pressure to a market already disrupted by the coronavirus pandemic.
Disruptions to the flow of oil and related products from Russia have rippled through energy markets as refiners race to extract petroleum products to meet the needs of a global economy still reeling from the shock of Covid-19.
The supply-demand imbalance pushed global benchmark Brent crude prices up more than 10 percent last month, the biggest gain since January. Brent for July delivery hit a high of $123 on Tuesday, compared with less than $80 at the start of the year.
The rise underscores continued supply challenges in markets for refined products such as gasoline and diesel, which began to face supply challenges even before Russia invaded Ukraine in late February.
“The price of crude oil is $120 a barrel, but the product price — what you and I pay for gasoline and diesel — is much higher. The overarching theme is a lack of investment,” Amrita, founding partner and chief oil analyst at Energy Aspects Sen said.
“We’re long-term: maybe ten years.”
The shortage of processing capacity has exacerbated an extreme crunch in supplies of products such as diesel, gasoline and jet fuel, prompting refiners to ramp up output, thereby increasing demand for crude, oil analysts said.
The shutdown of 2.8 million barrels per day of refinery capacity over the past two years, citing overcapacity during the coronavirus pandemic (and for environmental reasons), has made it difficult for the oil processing industry to meet demand during the current maintenance season. To make matters worse, in some parts of the world China has restricted fuel exports as inventories in some regions hit record lows.
Crude remains well below its all-time high of $147.50 a barrel in 2008, but prices have reached unprecedented levels as consumers pay for the profits of refiners that process crude into fuel and the distributors and retailers that sell it.
The gap in the diesel and gasoline markets is larger than in crude oil, so refined oil prices are rising faster. The European light oil contract, which represents diesel and other distillates, traded near a record level of $1,250 a tonne.
Refiners have vowed to boost throughput, pushing up crude prices and narrowing the gap between crude and refined product prices that have widened to record levels.
The increase in crude demand comes as the oil market faces upward pressure on other demand. China is easing lockdown restrictions in Shanghai and growth in summer travel demand is picking up.
“It’s a race between seasonal demand growth and refineries increasing their business to produce fuels,” said Rick Joswick, head of global petroleum analysis at S&P Global Commodity Insights.
Oil markets also faced fresh supply threats after Iran seized two Greek tankers last week, reducing the chances of any breakthrough in the Iran nuclear deal that would pave the way for the country’s oil supply to return to global supply chains. The move could further curb the free flow of oil from the Middle East from other producers such as Iraq.
“Behind the scenes, we are concerned about Russian supplies,” said Caroline Bain, chief commodities economist at Capital Economics.
The European Union reached an agreement late Monday to ban imports of Russian oil by sea. But Lars Barstad, chief executive of tanker firm Frontline, said on an earnings call that 2 million barrels of oil have been moved every day, equivalent to 6 percent of global seaborne oil trade.
Russian crude has managed to find a large number of willing buyers in China, India and Turkey, with exports even exceeding pre-war levels.
However, Russia’s exports of refined products fell to a 22-month low in May, causing local refiners to cut output, according to data from Vortexa. JPMorgan estimates that Russian refinery capacity is expected to reach 1.3 million bpd by the end of 2022, although other analysts say seasonal declines in Russian fuel exports are not unusual.
Uncertainty over whether Russia will be able to bring its crude to the market — especially after the U.K. and the European Union agreed to ban insurance for ships carrying Russian oil — has left prices vulnerable to rising volatility. Bank of America predicted that a sharp contraction in Russian oil exports could trigger a “full-blown 1980s oil crisis” and push Brent prices above $150 a barrel.
Some people are less bullish on price in the long run. Amy Myers Jaffe, managing director of the Fletcher School Climate Policy Lab at Tufts University, said the possibility of Russian oil being pulled from the market is reminiscent of the 1991 Iraq and Kuwait oil 5 million barrels a day lost from global markets.
She added that rising prices would eventually lead to a “catastrophic fall” due to demand destruction, a recession or government action on alternative energy — not a viable option during previous oil shocks.
“It’s a cycle, and it’s still a cycle. A cycle means it’s going down,” she said.
But UBS commodities analyst Giovanni Staunovo said an immediate recession seemed unlikely as the easing of coronavirus restrictions ignited consumer enthusiasm for travel.
“The only negative I see is that the pandemic has limited demand,” he said. “The underlying price needs to move higher to rebalance the market.”