Plugging the Gap: Crude, Chemicals, and the Ukraine Conflict

March 30, 2022

The conflict in Ukraine is heavily impacting both oil and downstream chemicals. Here is the current situation and outlook, plus all of the chemical increase announcements we’ve seen so far.

Crude Oil (situation/outlook):

Russia, one of the top three oil producers in the world, has been supplying about 10% of the global oil supply. Prior to the conflict in Ukraine, the total volume of oil supplied by Russia was 2.3 million barrels/day to Europe and 2.5 million barrels/day to the rest of the world. The oil market was already tight, with prices just under $100/barrel. The conflict in Ukraine began just over a month ago, on February 24. Since that time, a number of countries and companies have decided to stop buying from Russia. (So far, the EU has not banned Russian oil due to concerns on the impact to their economy.) Russian oil exports are down by 1/3. This has led to a major shortfall of oil on a global scale, and further price increases (although oil prices edged lower last week due to the EU decision).

In the short term, some demand pressure is being relieved by China. China is the world’s largest importer of oil, and has recently experienced a spike in COVID cases. This is expected to reduce demand by about 400,000 barrels/day in April compared to February. However, this nowhere near makes up for the total outage, and market prognosticators believe that increased seasonal demand this summer will push prices back up over $120/barrel.

How will the world do without Russian oil?

There are several places the oil shortfall could be made up, but only one option that seems to hold potential at present. OPEC+ has increased their quotas, but in reality are still underproducing on them. U.S. is still producing around 11.5 million barrels/day, and production increases have been minimal. This leaves Iran as the potential source for plugging the gap left by Russia. IF a nuclear deal is reached with Iran, this would allow them to increase oil production by potentially 1.3 million barrels/day. For the time being, expect oil prices to remain elevated.

It is expected that by next winter, higher costs, higher interest rates, and higher inflation will lead to less demand for oil.

Market prognosticators believe that even if the conflict ends tomorrow, all will not immediately go back to normal. Western countries aren’t likely to immediately remove sanctions against Russia, and are likely to continue to avoid Russian oil as much as feasibly possible.

Petrochemicals (situation/outlook):

Russia’s contributions directly to the global chemical markets are minimal. Their largest chemical export is Methanol, with a total contribution of just 3% of the global supply. It may take some time for trade patterns to shift, and cause some problems in the short-term, but the world can make up for the loss of Russian chemicals.

Here are the chemical increase announcements we’ve seen so far: