War in Ukraine: Oil Prices Likely to Remain High

Morningstar analysts expect a tight market and high oil prices to persist in the short run as the Ukraine war continues, but 2024 could see a shift in the dynamic

Allen Good 12 April, 2022 | 9:04AM
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oil rig in the sunset

As the Russian invasion of Ukraine drags into its second month, there is just as little clarity in the oil markets as there was a month ago. The flow of Russian volumes to the global market has clearly been disrupted, evidenced by oil prices remaining over $100 a barrel, but exactly how much is uncertain with estimates ranging from 1 to 4 million barrels a day (mmb/d). Western buyers continue to "self-sanction," avoiding Russian volumes at all costs, while opportunistic buyers in Asia capitalise on the wide discounts.

A negative demand impact will result from higher prices and lower GDP growth, but our estimates suggest it won't fully offset lost supply. That leaves US producers, OPEC, or Iran as the only potential for a near-term supply response, but each is unable or unwilling. As such, we expect a tight market and high prices, to persist in the short run.

Key Takeaways

> The market looks tighter than it did after we lowered our supply forecasts for 2022 and 2023 by about 2.3 mmb/d and 0.8 mmb/d, but demand by only 0.7 mmb/d and 0.6 mmb/d, respectively.

> An overcorrection is possible, though, as we assume these Iran volumes come back in 2023, with a glut in 2024-25. And if a deal is done more quickly, the oversupply could arrive even sooner.

Looking Ahead

However, by 2024, we see US growth, the full resumption of OPEC production, and the return of Iran volumes tipping global markets into oversupply and undercutting prices. Eighteen months is a long time in the oil markets, however, and a US recession (unlikely in our view) or failure to reach a deal with Iran or the unknown unknown could quickly change this outlook.

 

× The market looks tighter than it did after we lowered our supply forecasts for 2022 and 2023 by about 2.3 mmb/d and 0.8 mmb/d, but demand by only 0.7 mmb/d and 0.6 mmb/d, respectively.

× An overcorrection is possible, though, as we assume these Iran volumes come back in 2023, with a glut in 2024-25. And if a deal is done more quickly, the oversupply could arrive even sooner.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Allen Good  Allen Good is a senior stock analyst covering the oil and gas industries.