Oil Market: Too Much Bad News but Downside Limited as Embargo Looms

The unprecedented market and policy responses to the Russian invasion of Ukraine over the past two months have led us to adjust the shape for our oil price trajectory. With limited requirement to balance via demand destruction in the near term, we have adjusted our Q2-22 and Q3-22 forecast lower. However, with our expectations for a phased-in oil embargo limiting the volume of Russian crude available to the market towards the end of 2022 and into 2023 and “flow” supply side responses likely to be limited once the wave of SPR releases attenuates past October, the oil market is likely to shift to heavy draws once again. As such, we have raised our Q4-22 and 2023 price forecast. Chinese lockdowns following the 2020 trajectory (short-sharp fall followed by largescale expansion) would also support this revision. Into 2023, the potential requirement to refill the US SPR alongside more structural Russian production loss due to field damage associated with shut-ins (which are likely required in significant volume this year given the sharp fall in domestic refinery demand) will put a floor under the market, although rising tight oil production growth alongside slowing economic growth are headwinds. Brent is expected to average $106/bbl in 2022 and $90/bbl in 2023.