Don’t expect pain at the pump to go away soon.
A report last week by BMO Economics expects continued volatility in the global crude oil market.
“Crude oil prices will likely remain extremely volatile until we have a better idea of how the war is going to conclude,” Art Woo wrote in an April 8 report.
The bank economist was referring to the ongoing fighting between Russia and NATO-armed Ukraine.
“For now,” Woo continued, “our baseline view is that the conflict is going to drag on in the coming months and that official sanctions and self-sanctioning are likely to remain more or less the same.”
Crude oil prices surged beyond the $100 per barrel mark for the first time since 2014 after Russia started military action against Ukraine on February 24.
Prices have come down below the said level recently.
Woo wrote that because of the volatile situation, the bank is “comfortable with our current forecast for West Texas Intermediate (WTI) crude to average US$100/bbl [barrel] in 2022 and US$85 in 2023”.
WTI is produced in Texas and serves as a main global benchmark.
“It bears emphasizing that if the West were to completely prevent Russia from exporting crude oil, the upside for prices would be immense,” Woo wrote.
The BMO economist explained that Russian crude oil production, including refined products, totalled 11.2 million barrels per day (mb/d) in December 2021.
That’s 11.4 percent of the global oil supply.
Of this production, Russia exported 7.8 mb/d, with crude and condensates accounting for five mb/d.
“These figures explain why the Biden Administration’s decision to tap America’s Strategic Petroleum Reserves (by releasing 180 mb or 1 mb/d), which has been supplemented by the release of another 60 mb by other IEA members, is unlikely to materially reduce prices for an extended period,” Woo noted.
As well, “boosting the supply of crude oil remains challenging”.
For one, the Organization of Petroleum Exporting Countries has decided to “keep a tight lid on global supply” even in the face of the conflict in Europe.
Also, U.S. production has “remained essentially flat”.
Meanwhile, the potential for other major Western producers (Brazil, Canada, Guyana, Norway, etc.) to ramp up production this year, say by over 500 kb/d individually, is limited”.
Woo added, “It bears mentioning that the Canadian federal government just approved a small offshore project (Bay du Nord), which could end up pumping 200 kb/d further down the road.”
In his report, Woo also mentioned two scenarios.
One is a “sudden end to the war with a long-lasting peace agreement, which would lead to lower oil prices immediately”.
The second one doesn’t look pretty.
And this is that the “conflict worsens and leads to more severe sanctions on Russian energy, which would result in much higher oil prices”.