Tumultuous year for oil and gas industry amid Russia-Ukraine war, demand stress

Retail rate of petrol and diesel have not come down despite of the decline in crude oil prices (Representative image)

The year 2022 has been turbulent for the oil and gas industry around the world amid Russia’s invasion of Ukraine, record-high inflation globally, supply constraints and COVID-19 lockdowns in China.

The war between Russia and Ukraine led to alteration in the trade equations between almost all the countries as the European Union and the West imposed sanctions on oil exports from Russia, the second-largest exporter of crude oil.

Adding to that, supply cuts of from Organisation of Petroleum Exporting Countries and allies, commonly known as OPEC+, and rising inflation led to high energy prices.

Fluctuations in oil prices

Prices of crude oil in 2022 swung from the 14-year high of $140 per barrel in March to around $80 per barrel in December.

In the first half of the year, prices were majorly dictated by the developments in the Russia-Ukraine war. Oil prices skyrocketed after the US and the EU decided to impose sanctions on Moscow, leading to worries of supply shortages.

Responding to the sanctions, Russia began diverting oil supplies from its traditional markets and started selling oil at discounted prices to countries in Asia such as China and India.

India has saved thousands of crores of rupees buying discounted Russian crude oil and also saved on the outflow of dollars at a time when the local currency has been weak. According to industry estimates, India is estimated to have saved over Rs 35,000 crore by importing cheap Russian crude since February.

In 2022, prices have also been volatile due to the cuts in oil production imposed by the group of oil producing nations. Despite requests from several world leaders to pump more oil to bring down prices, OPEC+ maintained its stand over gradual increase in output.

G7 price cap

To hamper Russia’s largest source of income, the G7 countries — Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, with the European Union as a “non-enumerated member”—imposed a price cap of $60 per barrel on exports of Russian oil.

According to the G7 decision, companies providing transportation services, such as shipping and insurance will only handle Russian cargo if oil is purchased below or at the price cap. Meanwhile, Russia said that it will not supply oil to the countries that agree with the price cap.

Demand stress

The price of oil has tapered off in the recent months due to deteriorating demand amid global inflation and recession fears. Key central banks around the world have hiked interest rates to tame record-high inflation.

Oil prices have further tumbled owing to the COVID-19 curbs imposed in China— the world’s largest importer of oil—denting the fuel demand.

Energy experts say that benchmark Brent oil prices are seen rising from current levels by March but are unlikely to breach $100 a barrel, according to a poll conducted by Moneycontrol.

“Oil has been one of the most volatile assets, with the year 2022 starting off a with strong bullish momentum which had been building throughout most of 2021. But (it) saw a huge selling pressure as macro-economic headwinds took centrestage and apprehension about OPEC+ cuts and EU embargoes faded. Some of the geopolitical risk that sent oil higher earlier this year, specifically the Ukraine conflict, has also eased of late. Instead, investors main worries remain over a weakening economic backdrop and low liquidity across markets. Investors remain unimpressed by the G7 oil price cap that has not led to any anticipated supply shortage,” said Navneet Damani, Sr. VP, Currency & Commodity, Motilal Oswal Financial Services.

Impact on India

India, which is dependent on imports for around 85 percent of its oil needs, has been unable to escape the impact of fluctuations in global oil prices.

Retail fuel prices rose several times in the country in 2022 in line with the surge in crude oil prices.  In March, price of petrol crossed Rs 100 per litre-mark in Delhi.

Retail prices of petrol and diesel have not come down despite of the decline in crude oil prices, as the oil marketing companies need more time to recoup losses they have incurred when the prices had skyrocketed.

Surge in prices of natural gas

Similar to crude oil prices, natural gas prices also increased in 2022 due to Russia’s invasion of Ukraine. Gas prices were also high before the war begun as demand picked up after COVID-19 restrictions were lifted.

“Prices were high even before COVID-19 and Russia-Ukraine war. Everybody thought gas is a transition fuel and renewables will take over. So people did not invest in gas or LNG infrastructure which resulted in shortage of capacity in production. This did not reflect during COVID-19 because demand was less but as soon as COVID-19 was over, demand picked up and prices went up,” Rajesh Kumar Mediratta, Managing Director & CEO told Moneycontrol on December 23.

“We thought prices would come down in 2022 but because of the war it did not come down, rather it picked up and went up to $60, $70 per MMBtu,” he added.

US natural gas prices spiked to 14-year high in August at $9.33 per million British thermal unit (BTU).

India experienced an oversupply of gas in November as prices shot through the roof. On account of high prices, customers in India reduced gas buys, resulting in a surplus in the market.