The price of Brent crude ended the week at $82.78 after closing the previous week at $85.83. The price of WTI ended the week at $76.68 after closing the previous week at $79.68.
We have remained cautious about the global economy, even though the economic outlook has been improving. One of our long-held concerns pertains to the Federal Reserve being too aggressive in shifting to a tightening monetary policy and subsequently pushing the U.S. economy into a recession either through demand destruction or through a breakdown somewhere within the financial sector, which would then undermine the real economy. This concern stems from our view that the Federal Reserve has limited ability to address the root causes of the current inflation, which is not being driven by wage growth, but more so from supply-side factors. The collapse of the Silicon Valley Bank (SVB) at the end of last week is indirectly related to aggressive rate increases that have been implemented by the Federal Reserve. The bank was caught holding a portfolio of long-term Treasury bonds, which diminished in value because of the rate increases. At the same time the rate increases were negatively impacting the bank’s client base. With significant deposit withdrawals in recent days, the bank was in no position to remain open. It appears that the U.S. government will not bail out the bank, but will, instead, enable the remaining depositors to access their funds on March 13. The more lasting impact is that SVB was a major source of funding for startups in Silicon Valley. Additionally, there is always the fear of contagion when a major bank fails. Before the bank failure we were expecting that the Federal Reserve at its next meeting schedule for March 21-22 would only raise rates by 0.25% instead of 0.50%, even though inflation continues to be a concern. With the bank failure, we think a 0.25% rate increase is even in question.
We previously highlighted the efforts of China to act as a mediator for the Russia-Ukraine conflict, including the release of a peace plan that involved a cease-fire and peace talks along with removing sanctions on Russia. While the proposed peace plan was quickly rejected by the U.S. and EU, the effort was notable because of it being another sign of China taking a more prominent role in global affairs – and not only in the Asia-Pacific region. Last week, China was able to broker a deal between Saudi Arabia and Iran which will normalize relationships between Saudi Arabia and Iran after the two countries broke ties back in 2016. Such a deal could also be seen as another sign of the reducing influence of the U.S. and the west with respect to the oil market, including the decrease in oil volumes being traded in U.S. dollars.
Meanwhile, Russia has continued to export crude oil and the price for Russia crude oil has been increasing in recent weeks, in part, because of increased demand coming from Asia, including China. Russia is also reacting to the price cap that Europe placed on its refined products by shifting more refined products to Africa and to the Middle East where some of the imports are being further processed and blended for export. This is another example of the sanctions having limited impact on Russia’s export volumes, while affecting the trade flows, which are adding more inefficiencies into the crude oil and refined product markets.
For a complete forecast of refined products and prices, please refer to our Short-term Outlook.
About the Author: John E. Paise, president of Stratas Advisors, is responsible for managing the research and consulting business worldwide. Prior to joining Stratas Advisors, Paisie was a partner with PFC Energy, a strategic consultancy based in Washington, D.C., where he led a global practice focused on helping clients (including IOCs, NOC, independent oil companies and governments) to understand the future market environment and competitive landscape, set an appropriate strategic direction and implement strategic initiatives. He worked more than eight years with IBM Consulting (formerly PriceWaterhouseCoopers, PwC Consulting) as an associate partner in the strategic change practice focused on the energy sector while residing in Houston, Singapore, Beijing and London.
Q&A: EnCap’s Thielemann: Private Equity ‘Survivors’ Poised to Thrive
2023-03-21 - EnCap private equity veteran Brad Thielemann discusses the role of private equity in traditional oil and gas investing — including the need to ramp up investments to meet demand — as well as its trajectory for financing the transitions ahead.
SUPER DUG: The Alchemy of Turning P&A Liabilities into Cash [WATCH]
2023-05-31 - Nissa Darbonne, Hart Energy’s executive editor-at-large, talks with ZeroSix Chief Commercial Officer Samantha Holroyd about turning plugging and abandonment liabilities into cash.
Brazos Midstream Bets on the Permian’s Prowess
2023-04-19 - Brazos Midstream leadership reckons there will come a time where entering the public sphere makes sense, but for now, Brazos’ strategy reaps the rewards of private perspective.
Molecular Transformation: Exxon Mobil Tackles the Energy Transition
2023-05-01 - CEO Darren Woods discusses Exxon Mobil’s expansion plans in the Lower 48 and managing the energy transition in Hart Energy’s The OGInterview.
The Biggest Little Producer in the Permian
2023-06-01 - Mewbourne Oil CEO Ken Waits shares the strategy that propelled the 58-year-old private company to the top of the nation’s most prolific play, the Permian Basin.