Thursday, May 26

Analysts on the Ukraine unrest: – The oil price will go screaming high

At the same time as demand rises, no new production capacity will enter the market for the next three to five years, warns Wiggen. – It will create a very tight market.

Oil analyst and partner, Nadia Wiggen, in Pareto.

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Not only has the oil price risen ten dollars since the turn of the year, but is also at the highest level since October 2014. Nadia Wiggen, partner and energy analyst at Pareto points out three points that the oil price is hovering around 90 dollars a barrel:

  • First, we are at a critically low level for OECD crude oil inventories.
  • Secondly, we have increased instability with regard to Russia and the threat of a war with Ukraine.
  • Third, the demand for oil is increasing as the world realizes that the kind of shutdowns we have seen are not necessary.

Wiggen believes that demand will accelerate further towards the summer, as the world opens up and flights increase.

– We see that there will be too little available oil to meet demand. We also see that oil prices must rise enough to hold back some of the growth in demand in the short term.


– The oil price rose above 90 dollars a barrel yesterday, do you think it is likely that we will stay at this level?

– I think the oil price will continue to trade above 90 dollars a barrel, and maybe higher, especially if the situation with Russia and Ukraine persists, and even more if Russia actually invades, says Wiggen, and explains:

– The market has not priced in the long-term effects of the ongoing geopolitical situation. It seems that the market thinks this will last for a couple of weeks, but this may persist for several years, and especially with potential sanctions.

The Pareto analyst says they have historically seen the most activity in connection with unrest in future contracts. In this case, however, they have seen the prices of physical oil move higher than the futures contracts.

However, it seems that most people are waiting for a “dip” before they buy, which may come in connection with Chinese New Year and the Olympics, as China will consume less oil during this period.

– It can lead to a cheaper opportunity to buy, but then the oil price will go screaming high.

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Russia can push North Sea oil sky high

Since September, gas prices have risen extremely much, and oil prices are relatively marginal. According to Wiggen, gas prices have been equivalent to 360 dollars a barrel in oil.

– Russia is the world’s third largest oil producer, and we suspect that they have held back some oil as a margin now that they are preparing for the situation with Ukraine.

She explains that they can still hold back more oil, or they can send the oil to China instead of Europe. They have not used all the pipe capacity to China yet, so Russia can easily send the oil there instead. Wiggen further explains that the situation is like this because the current order is limited to 70 percent of maximum capacity due to the Olympics, which forces the price higher.

– This is where we can end up in an acute situation that will lead to the price of North Sea oil really skyrocketing, she says, and adds:

– It is because we want less oil immediately available here. Trucks can also be used all over Russia to move oil internally instead of using export terminals to Europe.

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Comment: Russia has an important means of pressure: Gas to Europe

Tight oil market for the next three to five years

Wiggen believes Opec + can influence by releasing more oil into the market. As Russia is also in Opec +, Saudi Arabia is an important player, as they have a good tone with both Russia and the United States.

Nevertheless, Opec + does not have unlimited production capacity. Pareto believes the oil cartel group has a capacity of about 4.5 million barrels per day, while Saudi Arabia has 1.8 million barrels every day of this capacity.

– It is probably not likely that they bring the 1.8 million barrels daily with spare capacity they have into the market, but they can increase production by 500,000 barrels per day, if necessary.

However, not all Opec members would be happy that Saudi Arabia would potentially increase production, because they prefer higher oil prices to bring back investment into Opec countries. They would therefore vote against a proposal for Saudi Arabia to increase production.

Saudi Arabia must balance stability and maintain a positive oil price environment. Compared to other commodities, such as aluminum, the rise in oil prices is moderate, so the need for further Saudi intervention against other OPEC members is not so urgent at the moment.

– More oil will enter the market, and what they have so far communicated to the markets has been an increase of 400,000 barrels per month. But we believe that these monthly increases will stagnate as early as April, when reserve stocks begin to thin out, says Wiggen, adding:

– The most important thing is that there is no spare production capacity that comes in Opec +. This means that spare capacity has been set, so that the market can deduct the 4.5 million barrels per day. There will be no more capacity for the next three to five years. This creates a very tight oil market that will last just as long, and the oil price will be higher for longer than the market expects.

– We have had many years of underinvestment while oil demand continues to grow, so there is a huge demand to catch up.

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