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By John Richardson
WHETHER OIL PRICES will rise to a high of $135/bbl – the worst-case warning highlighted in the above ICIS chart – was very much up in the air as this blog went to press.
The risk that this could happen, from yesterday’s Brent price of $105/bbl, has increased because of the EU and US decision to remove some Russian banks from SWIFT (Society for Worldwide Interbank Financial Telecommunication).
SWIFT is a secure messaging system that makes fast, cross-border payments possible, enabling international trade.
Only on Friday, it seemed as if expulsion from SWIFT wouldn’t happen because of objections from countries such as Germany. But those countries are now onboard. This underlines, as with all major conflicts, the pace at which events move.
“Russian exports of all commodities from oil and metals to grains will be severely disrupted by fresh Western sanctions, dealing a blow to Russia’s economy and hurting the West with a spike in prices and inflation, traders and analysts said,” wrote Reuters in this 27 February article.
The traders and analysts believed a spike in energy costs would happen despite some Russian banks – including Gazprombank, which services large oil and gas payments – having escaped full-blocking sanctions.
But the Reuters article and other media reports say that efforts are being made to minimise the impact of the SWIFT sanctions on energy markets.
On the other hand, we need to consider that Russia is the world’s second largest oil producer – and that OECD crude inventories are at a seven-year low, according to Ajay Parmar, ICUS Senior Analyst.
Russia supplies 2.3m bb/day of oil by pipeline to Europe, including via the Druzhba pipeline, which supplies refineries and petrochemicals complexes in Hungary, Slovakia, Czech Republic, Poland and the former East Germany.
ICIS data forecast that in 2022, 2.79m tonnes of ethylene (11% of total European capacity) and 2.34m tonnes of propylene (12% of total European capacity) will be reliant on refineries located along the Druzhba pipeline.
While some alternative sources of crude oil could be sourced, it is unlikely normal levels of operations could be maintained.
“European naphtha supplies may become limited due to the conflict in Ukraine. Russia supplies Europe with almost 50% of its naphtha imports,” added Parmar.
“If sanctions are implemented on Russian naphtha exports or Russia chooses to cut off or severely reduce supply to Europe, this could cause a spike in prices. With ARA [the Amsterdam, Rotterdam and Antwerp refining hub] naphtha inventories already near multi-year lows, this could severely impact the northwest Europe naphtha spread,” he added.
The higher the oil prices goes the greater the risk of the petrochemicals demand destruction I warned about on Friday.
We are already seeing inflation eat into demand GDP growth forecasts – although, as I stressed last Friday, polyethylene (PE) demand no longer moves in line with GDP.
But demand for the petrochemicals and polymers that go into durable goods, which often fall into the discretionary spending category, do move in line with GDP.
ICIS senior economist Kevin Swift now expects US GDP growth to slow from 5.7% in 2021 to 3.5% in 2022 – down 0.2 percentage point from his prior forecast – and to a 2.4% gain in 2023.
“Risks abound with heightened uncertainty from geopolitical events and tightening Federal Reserve policy. The unfolding invasion of Ukraine is fostering higher oil prices, which will erode economic growth. Whether it tips the global economy into a downswing depends upon the extent to which oil prices rise,” said Swift, in this ICIS news article.
However, he pointed out that the fundamentals of the US economy were still good, even with major headwinds from inflation, supply chain disruptions and geopolitical events.
Conclusion: Stay in touch with ICIS
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