Page 10 - ISQ - April 2022

INVESTMENT STRATEGY QUARTERLY

The Oil Market Is NOT Just a Russia Story:

Supply/Demand Fundamentals Are What Matter

Pavel Molchanov, Managing Director, Energy Analyst, Equity Research

For our readers with investments in the oil value chain, the
fact that oil prices reached fourteen-year highs in the early
spring of 2022 helps explain the Energy sector’s outper- It is equally true that the underlying oil market
fundamentals – good ol’ supply and demand – are
formance year-to-date, building on its gains from 2021, as bullish as they have been over the past decade.
when it had been the best sector in the S&P 500. On the
other hand, the oil market rally is also contributing to the Ukraine. Why does this matter for the oil market? Because Russia
global economy’s inflationary spiral, with consumers as produces approximately 11 million barrels per day, or 11% of the
well as businesses feeling the pain of high prices at the fuel world’s oil supply – on par with the US and Saudi Arabia – of which
pump. Whether we like it or not, high oil prices are here to 7.5 million barrels per day (bpd) is exported, including 4 million
stay. We forecast that West Texas Intermediate (WTI) crude bpd that is sold into European countries. Russia’s natural gas pro-
duction – three-quarters of which goes to Europe – is even more
will average $100/barrel (Bbl.) in 2022, with only a modest of a geopolitical hot potato. Thus far during the war, oil and gas
cool-off to $90/Bbl. in 2023. For some perspective, as pipelines have continued to operate normally. Also thus far, sanc-
recently as December 2021, WTI was in the low $70s. Brent tions have had only a peripheral effect on Russia’s energy sector.
crude, the global benchmark, should remain a few dollars Germany has made it crystal clear that the Nord Stream 2 gas
pipeline – an $11 billion project owned by the Russian gas giant
above WTI. Gazprom – will be blocked from operating for the foreseeable
GEOPOLITICS AND THE OIL MARKET future. The US has imposed an embargo on Russian oil, and the
U.K. and Poland plan to do so by year-end 2022, but unless the
There is no disputing the fact that geopolitical factors played a rest of Europe follows suit, it won’t mean much in practical terms.
major role in the oil market rally of recent months. The prime Separate and distinct from Russia/Ukraine, other geopolitical hot
example is the crisis that culminated in Russia’s invasion of
spots that contribute to high oil prices include Libya (the plan to

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