- Oil prices cross US$130/bbl on news that US and EU allies are considering a direct ban on Russian crude oil imports
- While this is a bit of a last resort gamble by the West, could send oil prices spiralling towards US$150/bbl or higher if it pans out
- In any case, we revise up our base case forecasts for average Brent crude oil prices for 2022 to US$95-100/bbl as conflict in Ukraine lingers on with more severe repercussions than we earlier expected
- In the bear case scenario for the world (bull case for oil), oil could trade at US$120-150/bbl range over next 3-6 months, with spikes towards US$180-200/bbl possible
Back to US$100/bbl era and more as Russia-Ukraine conflict escalates. Brent crude oil prices crossed US$110/bbl last week, as Russia started military operations in Ukraine starting 24th February, and as the conflict drags on for more than 10 days, Brent has today crossed US$130/bbl in a sharp upwards move. As the conflict drags on, Western countries including US and NATO allies have imposed a series of sanctions on Russia and connected individuals. This include sanctions on exports into Russia, sanctions on key Russian banks and access to interbank systems and blocking Russian central bank access to forex reserves held abroad, but given that Russia is a major exporter of energy including both oil and gas, and Europe is already reeling from a energy crisis, energy commodities have so far been kept out of the purview of sanctions for fear of boomeranging and damaging their own economies. The recent spurt above towards US$130/bbl and upwards though comes as news that US and EU allies are considering a direct ban on Russian crude oil imports
Why is Russia so important to the global energy system? Russia is the second largest exporter of oil to global markets, behind Saudi Arabia, and any sanctions or supply chain impact arising from the conflict would thus – no surprise – have a significant impact on oil & gas prices, as is being demonstrated right now. If we account for oil products, Russia is actually the world’s largest exporter of oil and oil products globally, with around 7.8mmbpd of exports in December 2021, according to International Energy Agency (IEA) data, of which crude and condensate accounted for 5.0mmbpd, and oil products accounted for 2.8mmbpd.
Europe and other OECD countries are a significant importer of Russian oil. China is the single largest importer of Russian oil at around 20-25% share, while EU countries combined account for 55-60% share of Russian oil. In December 2021, OECD Europe imported 3.1mmbpd of oil from Russia, which accounted for 34% of its total imports. Other OECD countries (Japan, Korea, US) accounted for another 0.8mmbpd of Russian oil exports. YTD In 2021, according to data from Reuters, OECD countries combined accounted for 75% of Russian oil exports, with 22% going to China and the remaining to India and Southeast Asia. Thus, with sanctions pouring in from the OECD bloc, around 75% of Russian oil exports or around 3.5-4.0mmbpd of exports could potentially found itself without buyers in coming weeks or months.
Both supply and demand for oil in 2022 will be impacted by this conflict. While oil is officially out of sanctions for now, many refiners, particularly in Europe, have adopted self-imposed embargoes of Russian crude cargoes, with refineries and banks unwilling to take the risk of falling foul of complex restrictions and insurance issues. Thus, at least between 1.5- 2.0mmbpd of Russian oil could already be out of the market. If oil exports officially come under sanctions, the number could be higher. We thus estimate oil supply growth will be lower by around 1mmbpd from our earlier estimates in 2022 (growing by 3.5mmbpd on average y-o-y compared to our earlier estimate of 4.5mmbpd), with growth coming from OPEC additions, removal of Iran sanctions and US shale production growth. On the other hand, there could be around 1mmbpd of demand destruction in the near term in Russia and Ukraine owing to the economic fallout of the year. Thus, on average, we now estimate global oil demand to grow by 3.0mmbpd y-o-y, compared to our previous estimate of 3.5mmbpd. With tighter supply-demand dynamics in play for the rest of the year, on top of depleted inventories, we thus revise up our oil price forecasts again.
US and EU considering ban on Russian crude? This comes as the latest shocker to an already fragile oil market. US Secretary of State Antony Blinken noted on Sunday during a media interaction that the US is now in very active discussions with its European partners about banning the import of Russian oil, while at the same time maintaining a steady global supply of oil. Given that previous sanctions have not been able to halt Russian advance into Ukraine, it seems that these potentially severe sanctions could realistically be on the table, though how the “steady global supply” of oil will be maintained without Russian oil seems to be a bit of a mystery to us at this moment. If this comes to fruition, we believe 3-4mmbpd of Russian exports could be impacted, and it will be very difficult to offset this by any means over any feasible period of time, OPEC surplus capacity or not, Iran deal or not.
Thus, expect very high oil prices to sustain in 1H2022. We had earlier outlined three possible scenarios for oil prices in our last report. Unfortunately, active conflict situation has come to fruition, and in the base case scenario of no direct Russian crude ban plus Iran nuclear deal happening, we expect oil prices to remain in the US$90-120/bbl range for the next 3-4 months, owing to the ongoing impact of disruptions and financial sanctions on Russian oil exports.
Bull case for oil (bear case for almost everything else) is above US$150/bbl. However, if Russian crude is banned by the West and exports plunge, we reckon oil prices will easily cross US$150/bbl in subsequent days and even touch US$180-200/bbl levels, depending on how much of Russian imports are actually shunned by the market. It is highly possible though that some Asian countries, including key consumers China and India, who have so far stayed neutral in the conflict, will buy more Russian crude at discounts to offset higher priced purchases from other sources. There will also be material oil demand destruction at levels above US$150/bbl, so we doubt any spikes above that will be sustainable for long.
Once the conflict deescalates or is resolved through talks, we believe oil prices will moderate, but far from pre-conflict levels as some sanctions and disruptions will linger and there could be structural changes in the way some countries lower their dependence Russian oil imports. Thus, not only are our oil price forecasts for 1H2022 revised up materially, but we also expect higher than previously forecast oil prices to persist in 2H2022 as well. Quarterly revised forecasts are presented below.
Overall, we revise up our average Brent crude oil forecast for 2022 to US$95-100/bbl (from U$77-82/bbl earlier) in our base case scenario. In a bear case scenario of direct sanctions on Russian crude and a lengthy conflict dragging on, our average Brent crude oil forecast for 2022 would be around US$110-115/bbl. No change yet to our 2023 forecasts of average Brent crude oil to moderate to US$85-90/bbl.
Oil price forecast by quarter (2022/23) – base case scenario
| (US$ per barrel) | 1Q22F | 2Q22F | 3Q22F | 4Q22F | 1Q23F | 2Q23F | 3Q23F | 4Q23F |
| Average Brent crude oil price | 100.0 | 107.5 | 94.0 | 87.5 | 87.0 | 86.0 | 88.5 | 90.5 |
| Average WTI crude oil price | 97.0 | 104.5 | 91.0 | 84.5 | 84.0 | 83.0 | 85.5 | 87.5 |
Source: Bloomberg Finance L.P., DBS Bank (forecasts)
Brent Crude oil price – DBS view (annual) – base case scenario
| (US$ per barrel) | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022F | 2023F |
| Average Brent crude oil price | 109 | 99 | 54 | 45 | 55 | 72 | 64 | 43 | 71 | 95-100 | 85-90 |
Source: Bloomberg Finance L.P., DBS Bank (forecasts)
Brent Crude oil price forecasts for 2022– scenario analysis
| Scenario | Remarks/ Assumptions | Near Term Oil Price Trajectory | 2022 Average Brent Crude Oil Price Forecast |
| Base Case Conflict is resolved within next 3 months with gradual withdrawal of sanctions | Energy is kept outside purview of sanctions. Between 1.5-3.0mmbpd of Russian oil exports impacted, offset by ramp up from OPEC, US and return of Iranian barrels | US$90-120/bbl range over next 3-4 months, with spikes towards US$150/bbl possible | US$95-100/bbl |
| Bear Case (bull case for oil)Conflict drags on for 3-6 months or more with severe sanctions, disruptions and impact to supply chains | Russian energy exports face direct sanctions. 3.0-4.0mmbpd of supplies affected, cannot be fully offset from other sources even over time | US$120-150/bbl range over next 3-6 months, with spikes towards US$180-200/bbl possible | US$110-115/bbl |