The energy crisis triggered by Russia’s February 2022 invasion of Ukraine appears to have eased as markets have adapted to the loss of some Russian oil and far higher volumes of natural gas. But this doesn’t mean that the world should not brace for further shocks as Moscow fine-tunes its response to a slew of financial and energy sanctions. With oil and gas demand rising in China as its economy reopens following the lifting of coronavirus pandemic restrictions, a surplus of supply might flip to a deficit in the second half of 2023.

In its February Oil Market Report, the International Energy Agency stated, “Nearly a year on from Russia’s invasion of Ukraine, global oil markets are trading in relative calm.” Prices are back to pre-war levels, currently within the $80 to $85 per barrel range as Russian oil production has held up relatively well, with Russian crude finding buyers in China, India, Turkey, and a smattering of other countries lured by steep discounts offered by Moscow.

Yet some analysts and at least one top energy executive believe that there is further upside potential for oil prices due to continued uncertainty about global economic growth, persistent inflationary pressures, and the potential for Russia to further weaponize energy.

Patrick Pouyanné, CEO of TotalEnergies, said on February 8 that the war in Ukraine and the geographic shifts in oil and gas flows caused by the sanctions and oil price cap imposed on Russia have splintered the market and created distortions. “We have today several markets, which does not help, obviously, to ease the price” of oil, Pouyanné said. He told analysts, after announcing record 2022 profits for his company, that we did not see “all the consequences of the growing gray markets” for the supply of oil. “When you look to this landscape … from our perspective, there is more support” for a price higher than $80/bbl, he said. Pouyanné added that he would “not be surprised to see $100 per barrel coming back.”

The consequences of the war in Ukraine are still playing out, and Russia has used its clout as one of the world’s biggest energy producers as a weapon in the conflict that pushed global oil prices to near-historic highs in 2022. Gas and electricity prices also rose to new all-time highs in Europe.

Oil prices reached a near record of $130/bbl shortly after Russian troops invaded Ukraine on February 24, 2022 but slipped back to current levels as high oil prices and China’s “zero-Covid” policy stunted demand growth. With China reopening, demand for oil and gas is picking up, though both the IEA and OPEC have cautioned that downside risks persist. “World oil supply looks set to exceed demand through the first half of 2023, but the balance could quickly shift to deficit as demand recovers and some Russian output is shut in,” the IEA noted in its recent report, which included higher estimates of Russian oil production. For February alone, the IEA projects Russian production will increase by 290,000 barrels per day to an average 10.04 million barrels per day for the full year. Additionally, the IEA increased its first quarter Russian supply estimate by 460,000 b/d to 10.84 mb/d.

OPEC was more cautious in its forecast for Russian production and is probably closer to the real number, given that Russia, alongside Saudi Arabia, is a leading member of the 23-member OPEC+ alliance of OPEC and non-OPEC oil producers. In its February Monthly Oil Market Report, OPEC reduced its 2023 forecast for Russian production by 40,000 b/d to 10.13 mb/d, which is higher than the IEA’s estimate. OPEC’s revised estimate for Russian supply in the first quarter was much lower than the IEA’s, projecting a rise of 80,000 b/d to 10.28 mb/d.

On the demand side, China is key. The IEA forecasts that China will account for roughly half of the projected 2 mb/d global demand growth in 2023, pushing total demand for the year to a record high of 101.9 mb/d. OPEC’s estimate for total demand in 2023 is the same as the IEA’s, though it raised its demand growth estimate by 2.5 mb/d from its assessment in January. OPEC’s February report noted that the total demand forecast is “subject to many uncertainties, including global economic activity, a possible shift in China’s COVID-19 policy, and ongoing geopolitical developments.”

Whether supply will match anticipated demand hinges on Russia’s response to sanctions and OPEC+ output policy.

Russia has responded to the European Union embargo on seaborne Russian crude and the G-7 price cap by announcing that it will cut supply by 500,000 b/d in March. Russian Deputy Prime Minister Alexander Novak, Moscow’s delegate to OPEC+, said in early February that Russia would curb oil output rather than sell to countries that adopt the price cap.

The purpose of the price cap, which came into effect December 5, 2022 in conjunction with the EU ban on Russian oil imports, was to keep Russian oil flowing to markets and avoid a price spike while depriving Moscow of benefits from higher international prices. The price cap was set at $60/bbl, meaning that Russia could hire tankers and obtain insurance on the international market as long as it sold below that price. A further EU embargo on Russian refined oil products came into effect February 4, but its impact on the market may not be felt for several months.

The consensus so far is that the price cap has worked in keeping the market supplied with oil while depriving Russia of billions of dollars in potential revenue were it able to sell at market rates. According to official Russian data, fiscal revenue from oil and gas dropped by 48% in January, while export earnings fell by 36% to $13 billion. This was because the average price of a barrel of Russian Urals crude, Russia’s main crude export stream, fell to $49.48/bbl in January, a drop of 42% from January 2022, the Russian Finance Ministry said.

Russia’s unilateral decision to cut output will alter the balance of OPEC+ supply, as quotas agreed to on October 5, 2022 are fixed until the end of 2023. Russia’s quota, which is equal to Saudi Arabia’s, was set at 10.478 mb/d, though that is higher than Russia’s sustainable production capacity, estimated by the IEA at 10.2 mb/d. Russia produced 9.77 mb/d of oil in January, down from 9.81 mb/d in December, following the EU embargo and the G-7 price cap. If it follows through with its decision to cut supply beginning in March, Russia’s production will be approximately 1.2 mb/d below its OPEC+ quota.

The IEA suggested the decision to cut production could be an attempt by Moscow to shore up oil prices and improve its fiscal position. Christof Ruhl, a former chief economist at BP and currently a senior research scholar at Columbia University’s Center on Global Energy Policy, said on February 17 that prices could go up if the war in Ukraine escalates and Russia uses oil as a weapon. The oil embargo and the price cap have given Russia a “fine-tuned weapon” to quickly raise oil prices, he said.

But Saudi Energy Minister Prince Abdulaziz bin Salman is adopting a wait-and-see approach and has dismissed speculation that OPEC+ will step in and pump more oil to meet anticipated demand growth. In a February 14 interview with consultancy Energy Aspects, he said the task facing oil producers in 2023 was “heavier” than in 2022 because there are “so many multi-issues … that are interchanging and changing … they could coalesce in one direction or another, and you may end up with a divergence of trends that just put you somewhere in the middle.” The only way to deal with such uncertainty is to be excessively cautious, he added.

Prince Abdulaziz singled out the IEA for criticism, saying the market was “hijacked by erroneous assessments” made by the energy watchdog when it predicted at the start of the Ukraine crisis that Russian output could fall by 3 mb/d. The IEA, he added, was guilty of “scaremongering” when it said the OPEC+ decision to reintroduce quota cuts in October 2022 heightened energy security risks.

But should Russian supplies decline further in the months ahead, OPEC+ might come under pressure again to increase production. The task of balancing markets would fall on Saudi Arabia and the United Arab Emirates, the two countries with sufficient spare production capacity to ramp up output. However, there is no indication that either will act without a collective OPEC+ agreement.

OPEC+ has persistently fallen short of its collective target, as some of its members have struggled to meet higher quotas because of capacity limitations. According to secondary source estimates, OPEC’s production averaged 28.87 mb/d in January, a 50,000 b/d decline from the previous month. With OPEC+ cuts in force for the remainder of the year, there is little scope for sizeable production gains from within the group. The IEA sees global oil supply expanding by 1.2 mb/d in 2023, with countries outside OPEC+ – the United States, Brazil, Norway, Canada, and Guyana – all set to pump at record levels.

Both OPEC and the IEA see global demand rising to 101.9 mb/d and estimate that OPEC would need to pump above 30 mb/d to balance the market in the fourth quarter.

But as Prince Abdulaziz’s statements make clear, there will be no easing of cuts anytime soon. Prince Abdulaziz mentioned he is skeptical as to whether a surge in Chinese demand would be cyclical or sustained growth. The Chinese economy is “unlocking, and because of that you will have demand … But we all went through cycles of opening and lockdowns … What assurances would we have that what we went through … all of us, every country … cannot be repeated?” he asked, adding that other uncertainties include the impact of interest rate hikes on the global economy and demand growth.

OPEC and the IEA revised up their China demand expectations for February by 130,000 b/d and 20,000 b/d respectively. The U.S. Energy Information Administration’s estimate was even higher with an upward revision of 160,000 b/d. “Following the relaxation of anti-Covid lockdown measures in China, the country is set to resume its established role as the primary engine of world oil demand growth. An increase of 900,000 b/d this year will account for 45% of global gains,” the IEA stated. But it cautioned that downside risks persist. “Notwithstanding the sharp rise in some activity measures, it will take several months to fully reopen the country, and some re-imposition of restrictions may be required.” Similarly, the EIA, which forecasts strong 730,000 b/d annual demand growth, noted “significant uncertainty around our demand forecast remains based on possible outcomes for the evolving global economic conditions and China’s pivot away from a zero-Covid strategy.”

OPEC also sees China driving growth in demand. Beijing has traditionally sourced its oil from the Middle East, though Russia’s share of the Chinese market has grown as Russian oil shunned by European refinery operators even before the embargo was formalized was redirected to the Asian market.

All eyes will be on OPEC+ ministers when they meet in Vienna on June 4 to determine whether the outlook for the second half of the year will justify an adjustment to supply. So far, that would seem unlikely judging by Prince Abdulaziz’s emphatic response to what he dismissed as flawed interpretations of market signals. “The agreement that we struck in October is here to stay for the rest of the year, period,” he declared.