Executives and officials from some of the world’s top oil and gas companies said on Tuesday energy markets are balanced now, but could be easily be disrupted due to tight spare production capacity and supply uncertainties related to Russia’s war in Ukraine.
The comments at the CERAWeek energy conference in Houston show the industry remains on edge after weathering the initial aftermath of one of the biggest shocks to global energy flows in recent memory. A temperate winter helped by giving major consumers in Europe a reprieve from typically high demand for heating fuels.
“There is very small spare capacity available so small changes in supply have impact,” said Anders Opedal, Chief executive of Norwegian energy giant Equinor. “It is easy for the market to move in either direction.”
Opedal predicted natural gas supply uncertainty faced by Europe since Russia invaded Ukraine and cut off regional supplies will continue in 2024 and likely 2025. Tighter global crude supplies are also possible after the Kremlin’s threat last month to cut 500,000 barrels per day (bpd) of supply from March.
On Monday, U.S. energy executives and top OPEC officials discussed concerns about a lack of spare oil production capacity at a private dinner on the sidelines of the conference, an executive who attended said.
“We may have gotten through this winter surprisingly well, but I don’t think we’re out of the woods yet,” said Michael LaMotte, senior managing director of investment firm Guggenheim Partners. “And things actually could get worse before they get better.”
Tight spare capacity makes it critical for governments sanctioning Moscow for the invasion of Ukraine to put a price cap on Russian oil instead of capping the country’s ability to export crude, said Frederic Lasserre, Gunvor’s global head of research and analysis.
U.S. energy envoy Amos Hochstein said the price cap – designed to reduce Russian revenues without slowing its exports – was working well, as Russian oil was still finding its way to market.
The Group of Seven countries, the European Union and Australia implemented the price cap on seaborne cargoes of Russian oil on Dec. 5, setting it at $60 a barrel.
On Feb.5, the G7 and allies also implemented a price cap on Russian fuel sales.
On Tuesday, the Kremlin said it did not recognize the price cap.
Though Russian oil is still getting to market, it is at different costs, as ships must travel longer distances to get the crude to countries that have not imposed sanctions, said Chevron CEO Mike Wirth.
Officials including chief executives from Gunvor and Kuwait Petroleum Corp have reassured attendees at CERAWeek that the oil market has stabilized and reached balance, leaving behind fears of shortages this winter of crude, gas and fuel.
However, the oil market outlook later this year becomes murkier as companies, consumers and governments wrestle with factors ranging from fears of a potential global recession and higher interest rates to growing energy demand from China as it exits coronavirus restrictions.
Crude prices may rise in the second-half of the year as Chinese demand returns to the market, Gunvor Chief Executive Torbjorn Tornqvist said on Monday.
On Tuesday, U.S. Federal Reserve Chair Jerome Powell told lawmakers the central bank will likely need to raise interest rates more than expected to control inflation.
“This year is going to be a harder environment… driven by wider macro economics, also combined with what is going on with flows from Russia,” said Savvas Manousos, CEPSA’s executive vice president of global trading.