Brent Sold for $112.60 as Russia-Ukraine War Stokes Fears
Oil prices saw a sharp rise during the week amid the ongoing war between Russia and Ukraine, stoking fears of disruptions to energy supplies. International benchmark Brent crude oil traded at $112.60 per barrel on Friday, posting a 10.4% gain from the Monday session that opened at $101.98 a barrel.
American benchmark West Texas Intermediate (WTI) registered at $110.06 per barrel at the same time on Friday, increasing 15.8% relative to the opening price of $94.99 a barrel on Monday.
Talks between Russia and Ukraine held in Belarus on Monday failed to result in an agreement, but the second round of talks on Thursday offered hope when both sides agreed on a plan to create a humanitarian corridor.
The price of oil climbed above $100 on Monday, as some Russian banks were banned from the SWIFT international banking system in a move to limit the ability of Russia in the global financial system and international foreign trade.
Brent was up by 6.6% to $107.67 on Tuesday compared to Monday’s closing of $100.99, while WTI showed an 11.5% increase to $106.78 from the previous session closing at $95.72.
Prices came under pressure on the sustained aggression in Ukraine and the inconclusive outcome of the first round of negotiations between Ukraine and Russia.
On Wednesday, oil prices spiked to new highs, after 23-members of the Organisation of Petroleum Exporting Countries (OPEC) and its allies including Russia, known as OPEC+, met via videoconference and agreed to adhere to the current plan of increasing output by 400,000 barrels per day (bpd) through April
The meeting did little to quell the global oil market or bring down prices, as Brent hit $115.11 and WTI reached $107.12 on Wednesday after the meeting concluded.
The war between Russia and Ukraine caused oil prices to skyrocket on Thursday as fears of supply disruptions amid sanctions targeting the Russian economy increased.
On Thursday, Brent crude hit its highest level since May 2012 and WTI also saw highs not seen since September 2008, rising to $119.84 a barrel and $116.57 a barrel, respectively.
Brent may leap to $130 if Russian crude exports fully stop
Brent crude could hit as high as $130 a barrel if Russian crude exports are fully halted, according to the latest study of the Oxford Institute for Energy Studies (OIES).
The report estimates that around 4.2 million barrels per day (bpd) could stop if Russian exports are fully disrupted. Brent is projected to rise further towards $130 a barrel before holding above $120 a barrel well into the third quarter of 2022. It will average $116 a barrel for the year, the report finds.
After the Russian invasion of Ukraine, the US, UK, European Union, Australia and some Asian nations immediately responded with international sanctions targeting Russia’s economy. This first round of sanctions imposed on Russia, however, did not target oil supplies or energy payments.
Nonetheless, the White House on Wednesday said it is open to imposing sanctions on Russia’s oil and gas flows.
Although the initial US and the EU sanctions were designed not to impact energy trade flows and energy-related payments, the announcement that some Russian banks will be banned from the SWIFT system prompted some financial institutions to self-sanction by refusing to finance Russia-related transactions.
There is also evidence that some companies have been reluctant to purchase Russian crude as risks of exposure to Russian entities have increased, the report said, adding that this “self-sanctioning” is already impacting oil supplies.
With expectations of 3 million to 4 million barrels of disruption at its peak impact, the OIES said if such a quantity of Russian oil dissipates in March and April, which would account for 70% of Russia’s total crude oil exports, it would cause a supply shock and add nearly $25 a barrel to the price of Brent.
Given the potential impact of such high prices on the global economy, the report highlighted that the US and its allies would want to avoid such scenarios, though Russia, in retaliation to current sanctions, may also decide to restrict energy supplies.
ADM Investor Services’ Chief Global Economist Marc Ostwald said the self-sanctioning tendency of these oil companies is ‘a key point.’
He said ‘it is understandable given an array of fear of litigation, due to the payments, sanctions, but more importantly reputational risk, western oil companies do not want to be seen supporting Russia in any way.’
Other side of coin is Iran
The OIES said that one of the key dynamics shaping the oil market this year is the potential increase in Iran’s production if sanctions on the country are lifted.
Although parties to the 2015 Iran nuclear deal are making some progress in their negotiations, reviving hopes that they could soon agree on mutual steps to restore the accord, formally known as the Joint Comprehensive Plan of Action (JCPOA), it remains unclear whether the current Russia-Ukrainian crisis would increase pressure on the US to resolve the outstanding issues and conclude a deal.
According to the report, Iran could take advantage of the added pressure on oil markets and push harder to achieve its demands and reopen issues that had already been agreed upon, resulting in further delays.
But regardless of when a deal is reached, with some suggesting a deal could be imminent by next week, the report said Iran’s oil exports have already been rising in recent months.
According to Iran’s oil ministry, Iran’s sales of petroleum products to foreign buyers reached a record high despite US sanctions. The latest estimates from companies that track Iranian flows put Iranian oil exports in 2021 at 1.2 million bpd, about 250,000 bpd higher than both 2020 and 2019.
“This implies that Iran’s production increase from the current level could be smaller than consensus, especially since Iran may have lost some productive capacity under sanctions,” the report said. Ostwald maintains that talk of a JCPOA deal being near in recent days has largely emanated from Russia.
“There is some risk that all this talk is ‘distraction propaganda’, but a deal hinges on USA acceptance, not on Russia and/or the EU,” he said.
He argued that increased Iran output may prove to be something of an offset, adding “but as we know from Chinese oil data, Iran has been exporting a lot to China, so how much of an increase will it really be, and indeed how much extra output capacity is there to increase output… there is good reason to be sceptical about how much of an offset to lost Russian supply would it really be.”
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