Expectedly, the increasing intensity of Russia’s military operation in Ukraine has provoked severe sanctions from leading economies such as the USA, the UK, and the EU. Most notably, the USA recently banned Russian oil imports, and the UK said it would phase them out by year-end. We, however, note that the war had already triggered speculative buying in the crude oil markets, with the international crude benchmark Brent reaching $ 138.5/ bbl on 7th March 2022, its highest level since July 2008.
Essentially, oil traders were already pricing in the effects of potential western sanctions on Russian oil as several oil majors closed shops in the Eastern European nation.
Potential impacts: Given Russia’s limited floating oil storage, these developments may result in shut-ins of oil assets. According to IEA, Russia is the world’s largest oil exporter, with Europe and USA accounting for c.60.0% and c.8.0% of its exports, respectively. Thus, the restrictions on its global contribution may have far-reaching implications on international oil economics.
However, we note that the recently announced sanctions are likely to affect only c.10.0% of Russia’s export, with the EU yet to communicate any sanction on Russian oil. In our view, an EU sanction may not have been fully priced in by the market, leaving legroom for more price increases in the coming months.
The dynamics at play could suggest a need to boost supply from other sources to ease pass-through to oil prices and inflation. We believe this view is consistent with the USA’s recent engagement with Venezuela, which was geared towards a ramp-up of global oil supply.
However, OPEC+ has reiterated its decision to stick to its 400kb/d increment program despite notable excess capacities in Saudi Arabia and UAE. USA’s desire to drive its own supply may also be slightly hindered by reported shortages of shale workers and equipment.
All-in, an expansion in supply deficit will likely place further pressures on oil prices. This expectation bodes well for oil producers, including our flagship upstream coverage company – Seplat Energy Plc.
We currently have a cautious 2022 realizable oil price forecast of $90/bbl and a 12-month TP of N961.22 for the ticker. However, we sensitize our company valuation to take account of different oil price scenarios below.
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