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This has been an eventful weekend for oil. After weeks of silence, first Halliburton (HAL) and then the other major oil services companies (OIH) announced they would not undertake any new work in Russia. While not fully withdrawing from the country, this poses a risk to Russia’s future manufacturing capacity. And could be a first step to full withdrawal, which could have a larger and more immediate impact. Oil sites across Saudi Arabia have been attacked by Houthi drones, a reminder of the risk of a short-term disruption in oil exports from one of the largest remaining sources of oil exports. And US gasoline demand data was strong despite the recent price hike.
Oil was already in a tight supply-demand situation, with demand growing faster than supply, even before Russia invaded Ukraine, as discussed in this oil market update.
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And oil supplies are rapidly depleting, and more are to come before geopolitical disruption occurs:
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This is reflected in the commodity futures markets, with fairly strong Oil (OIL) prices up 38% year-to-date:
Data from YCharts
Against this strong fundamental backdrop, the market is vulnerable to volatility and further price increases. This frames the weekend’s geopolitical oil supply disruptions and strong US gasoline demand data as potentially more price-impacting than they otherwise would be.
Oil service companies reducing exposure to Russia:
In this context, the news that Halliburton, Schlumberger (SLB) and Baker Hughes (BKR) are not offering new technology or working on new projects could exacerbate the situation and push prices even higher. Although the service companies are not completely withdrawing from Russia, this is an important step for these companies considering how much work they do in Russia. And it could be a first step toward full disengagement, depending on how much pressure governments and others put on them.
According to Energy Intel, Schlumberger makes 5-8% of its sales in Russia, while Halliburton makes 2% of its sales there. However, Schlumberger reportedly mostly employs Russian nationals, potentially softening the impact of reducing his new work there without fully retiring. Regardless, it will be interesting to watch the market reaction to these three major oil service providers — this could be a good indicator of how much oil production may be coming off the market. And it’s worth watching if they continue to reduce their exposure as pressure and sanctions mount.
Drone strikes on Saudi Arabia’s oil infrastructure
There have been Houthi drone and missile attacks on Saudi oil infrastructure in three cities:
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According to Ellen Wald, author of Saudi, Inc., “The geopolitical risk of Iran/Houthis being able to hit Jeddah would be a significant jump after the attack on Jizan.” And the government of Saudi Arabiaa said: “The Attacks and debris from intercepted projectiles inflicted material damage but no loss of life.
It’s unclear how badly production, refining or distribution could be affected, but the number of attacks points to a growing near-term geopolitical risk to Saudi oil exports, despite claims that missiles and drones have been shot down by Saudi air defenses.
Combining the short-term supply disruption risk of Saudi Arabia, a leading exporter of oil and related products, with the medium-term supply risk of another leading exporter, Russia, as essential services are increasingly deprived and capital from oil majors is no longer provided, could result in a further undersupplied market and significantly higher oil prices.
Demand-side data also points to a risk of high oil prices. GasBuddy is a great resource for up to US gas demand data because it has access to real-time data that it selectively shares on Twitter. This latest update showed that “weekly (Sun-Sat) US gasoline demand was up 3.3% from the previous week and was up 4.8% from the four-week moving average and the highest since the week ended 8th/8th
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This strong US gasoline demand is despite spring, which is typically a weaker demand season than summer. And that’s despite oil and gasoline prices, which have risen significantly over the past month and year. Higher demand with higher prices indicates significant inelasticity of demand versus price. This means that oil prices could continue to rise and US consumers could continue to use as much or more gas. Destroying demand for oil could require much higher prices!
Data from YCharts
Summary:
This was a weekend of enough notable oil market data to write about. US gasoline demand rose despite rising prices, belying growing murmurs of “demand destruction” from economists and others. And geopolitical threats to near- and medium-term oil supplies increased in the face of a very tight oil market. Oil prices could rise in the near term and, if current trends continue, could rise even more if these threats prevail and demand continues to rise.
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