Russia on Oil & Gold, what is the take?

Russia’s Energy Decoupling Begins in Earnest

Russia recently decided to cut its supply of oil by 0.5 million barrels per day starting in March, and some people believe it is a response to the European Union's sanctions on Russia's energy exports.

However, others think that Russia is struggling to find buyers for its oil. Regardless of the reason, this cut in supply supports the idea that Russia may have to stop providing up to 1.3 million barrels of crude oil and refined products this year due to recent EU bans. The trading of these barrels has already been accounted for in the market, so the current range-bound trading reflects the realization that these barrels will soon be unavailable on global markets.

GLOBAL COMMODITIES (-1.2% W/W; -2.6% YTD)

2.4m b/d of Russian crude oil and refined fuels to the EU at stake

It is unclear what will happen exactly with the European Union's embargo. I predict that Russia will be able to sell some of its oil to other buyers, but not the full amount affected by the sanctions, which is around 2.4 million barrels per day. In recent months, India, and Turkey, and to a lesser extent China, have increased their purchases of Russian oil, allowing Russia to keep exporting large quantities of oil. However, compared to last year, Russia's oil exports have slightly decreased from about 7.8-7.9 million barrels per day to 7.3-7.4 million barrels per day recently.

Russian crude oil rerouting will not be easy

Russia is currently the largest supplier of crude oil to China, providing about 18% of its crude imports in recent months, which is much higher than what other big suppliers to China have reached in the past. India has also become heavily reliant on Russian oil, with almost a quarter of its crude oil imports now coming from Russia. However, for India to buy even more oil from Russia, it would have to import less from its usual suppliers in the Middle East. Turkey is also limited in how much oil it can buy from Russia, given the size of its market.

Russian oil products exports also a challenge

When it comes to oil products, the situation is more difficult. India, Turkey, and China have bought crude oil from Russia, but they don't need Russia's diesel because they already export diesel themselves. Also, Russia's diesel has been sold at a lower price in the international market for a while. There aren't many other buyers for Russian diesel, at least not in significant amounts. If Russia wants to find new customers, it will likely have to look further away, which means shipping could become a problem.

Demand growth could lead supply constraints to bind later this year

We believe that due to low oil reserves and limited spare production capacity, it won't take much for a surge in Chinese demand to run into supply problems this year. This situation has become more challenging this week due to Russia cutting its oil supply.

ENERGY (1.5% W/W; -7.3% YTD)

Crude oil

Unipec, which is the trading arm of Chinese refiner Sinopec, is increasing its oil purchases as consumption is expected to pick up in China after the end of strict COVID policies. They have purchased about 10 million barrels per day from the UAE for April, and other Chinese refiners such as China National Chemical Corp and Rongsheng Petrochemical have also bought cargoes, including from the US. These cargoes are expected to arrive in May, which coincides with an expected increase in oil consumption in the second quarter of 2023.

Global oil demand at the beginning of the year was 99.9 million barrels per day, while supply was 101.5 million barrels per day, with a spare capacity of 2 million barrels per day. With the addition of 2.2 million barrels per day of Chinese demand due to reopening, nearly half of the spare capacity will be used up. Moreover, this calculation does not even account for potential losses in Russian exports, which seems likely. In the coming months, China may unveil stimulus packages that could further increase energy consumption.

Overall, the average Brent forecast for 2023 is expected to be USD 101 per barrel, peaking at USD 112 per barrel in the third quarter of 2023. The balance of bullish and bearish risks may add or subtract no more than USD 10 per barrel from the price expectations.

PRECIOUS METALS (-0.8% W/W; 1.5% YTD)

Higher for longer Fed rates is bearish gold that is seen as an informal barometer of sentiment

The price of gold has dropped to its lowest level in over five weeks because the latest US inflation data suggests that the Federal Reserve will maintain its policy of keeping interest rates high.

Rates markets show that there is an expectation for higher interest rates for a longer period of time, as cuts in the funds rate are no longer seen as likely in the near future. Over the past year, the price of gold has struggled due to a macroeconomic environment that lacks fear and wealth, which are two factors that drive gold prices. Western investors were confident that central banks' monetary policies would control the overheating economy, while Chinese households were unsure about COVID policies and faced a stronger dollar, which led to low demand for gold.

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