A general view shows Marathon Petroleum’s oil refinery in Anacortes, Washington March 9, 2022 following the Russian invasion of Ukraine.
David Ryder | Reuters
Oil prices are rising again and are expected to see more sharp spikes and sudden falls as the world grapples with potential supply shortages.
For consumers, that means an extended period of expensive gas – with prices remaining above $4 a gallon at the pump. For the economy, that means more inflation. In addition to the burden on consumers, all companies that rely on petroleum will face higher costs overall – from airlines and truck drivers to chemical companies and plastics manufacturers.
Russia’s invasion of Ukraine came at a time when oil prices were already rising due to tight supplies and growing demand from reopening economies. Now, the loss of a large chunk of Russia’s exports of 5 million barrels a day has put additional pressure on prices.
“I remain constructive on oil because I don’t see an immediate start to the war in Ukraine. Market participants have always backed Putin when it came to his stated willingness to negotiate, but we think we should pay attention to his actions, not his words,” said Helima Croft, head of global commodities strategy at RBC.
Oil prices rose more than 7% on Monday as the European Union considers joining the US on an oil embargo and after Saudi Aramco facilities were attacked by Iran-allied Houthi rebels in Yemen over the weekend.
Analysts also concede that the price could take a sudden tumble, especially if Russia’s attack on Ukraine is somewhat resolved.
“The range of results in a given two-week period is wide. We went from $90 to $130 a barrel in a month. We went from $125 to $95 in a week and that will be the normal type of volatility. $10 a week is nothing, 10% is nothing,” said Daniel Pickering, chief investment officer of Pickering Energy Partners.
Pickering said the market feared trading again on Monday.
“They don’t want to take higher price points off the table in terms of possibilities, but I think we’ve seen that there’s a fear of something and right now it’s a fear of action around Russian casks and that’s going to get a lot done “Of volatility,” he said. “If it becomes reality, I think you’re more biased by those levels. You’re putting $130 back in play if we actually start canceling Russian barrels.”
Pickering estimates that 2 to 3 million barrels of Russian water-based oil were frozen off the market every day with no immediate buyers. He said China and India would continue to buy Russian crude. “I’m sure there will be others on the fringes who are willing to take on more over time,” he said.
Pickering said he doesn’t forecast a return to $130 a barrel of oil, but adds it could happen. West Texas Intermediate April crude futures rose 7% to $112.12 a barrel on Monday.
Francisco Blanch, head of commodities and derivatives at Bank of America, said the US market is set for periodic price spikes.
He said in a note that limited output growth and strong refining and export demand are causing inventory shortages at US warehouse Cushing in Oklahoma. This is a key oil facility for crude oil traded in US futures contracts. The lack of storage there could create more volatility in the futures market as the holder of a futures contract must be physically delivered when the contract expires.
In April 2020, this convergence resulted in a negative price for WTI oil as investors were forced to liquidate their positions at negative prices during a period of very low demand. Now, the reverse could lead to price spikes during expiry as investors try to buy, Blanch noted.
The April contract expires on Tuesday. “Given that the market is hopelessly short in the near term, we see an increased risk of a short squeeze as WTI approaches expiry each month,” Blanch said.
European ban?
The European Union is expected to discuss a ban on Russian crude oil, but there are disagreements among members. Talks between EU governments and President Joe Biden are taking place this week in a series of summits aimed at ramping up the response to the Russian invasion.
“I think the prospect of sanctions or an embargo on Russian oil in Europe is really growing and the pressure will increase as the week progresses,” said Dan Yergin, vice chairman of IHS Markit.
“But it needs to be done carefully and in careful consultation with industry to minimize this disruption,” Yergin said.
Croft said she was skeptical that Europe would agree to a ban. Europe is Russia’s largest export market for oil and natural gas.
“I still think Germany will block any EU effort to impose energy sanctions, so the economic lifeline that Putin is offering through oil and gas sales will remain in place,” Croft said.
Russia’s financial system has been sanctioned by the US and allies, and the US has banned Russian oil. Croft said more sanctions could be forthcoming.
“The brutality of his military campaign will likely mean that sanctions will remain in place for the foreseeable future and that Russia will remain a toxic commodity,” she said. “I think we should pay more attention to Congress because it could move on to imposing secondary sanctions that would essentially force Germany to go hand-in-hand on this matter.”
delivery bottlenecks
Oil facilities in Saudi Arabia were attacked by Iran-allied Houthis over the weekend. The rocket and drone strikes were fired at a water desalination plant, a liquefied natural gas plant, a power plant and a gas plant. Aramco said there has been no impact on shipments.
“The Saudis are using this Houthi attack as a cover to say they absolve themselves of any responsibility for supplying the oil market because of the attack,” said John Kilduff, partner at Again Capital. He noted that Saudi Arabia’s relations with the US were strained during the Biden administration.
“The Saudi refusal to expand supply exacerbates the pricing problem for consumers because they are exacerbating the pricing problem for consumers around the world,” Kilduff said.
Saudi Arabia is a leading member of OPEC+, which also includes other OPEC producers and Russia. The group agreed to bring 400,000 barrels per day to market each month through June. At its last meeting, OPEC+ did not signal whether it would consider adding more barrels.
Saudi Arabia has remained silent on the invasion and has not promised to bring more oil to the market beyond its earlier plans. British Prime Minister Boris Johnson visited the UK last week and US Secretary of State Antony Blinken is also expected.
“Saudi Arabia remains committed to sticking to the OPEC+ easing formula. Boris Johnson returned to London empty-handed and now, with Houthi attacks on energy infrastructure intensifying, the Kingdom is warning it may not be able to sustain current levels of production,” Croft said.
Yergin said it was difficult for Saudi Arabia to break away from the OPEC+ partnership. “The OPEC+ partnership was really a Saudi-Russian agreement and before all this started it was a source of stability for the market,” Yergin said. “Ever since the 2014 price drop, their goal has always been to bring Russia into an agreement rather than leave Russia out as a competitor. Their relationship has deepened and they have become strategic partners.”
Yergin said the relationship was brought together at the highest level – between Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman.
“If OPEC doesn’t turn on more barrels, the market will pick up,” Pickering said. “I don’t think they feel very compelled in the short term. I think there’s a lot of wit going on… I think there’s a dynamic that says OPEC production will continue to increase, but not necessarily at the rate that Europe and the US would like.”
Other sources of supply
The US has been looking for other sources of supply, including possible kegs from Venezuela, which is under sanctions.
The market had been expecting a deal with Iran that would allow it to return more than 1 million barrels a day to the market in exchange for agreeing to end its nuclear program. But those talks have stalled in recent weeks.
US producers could also bring back more oil, but their contributions are not expected to be much larger than the 900,000 to 1 million additional barrels per day already expected this year.
Some oil executives met at the White House on Monday.
“I don’t think the industry feels much pressure to take action. There are price fluctuations. There’s a discussion about windfall profit taxes,” Pickering said. “We’ll have to see if the government provides any carrots. They certainly provided sticks, but I don’t think sticks will work.”
Correction: Antony Blinken is the US Secretary of State. A previous version misspelled his name.