Topline
Oil prices continued to skyrocket on Tuesday as Russia’s military ramped up its assault on Ukraine’s capital city of Kyiv, with U.S. West Texas Intermediate crude surging to seven-year highs of around $105 per barrel amid fears that the conflict could further disrupt a tight global energy market.
Key Facts
U.S. oil benchmark West Texas Intermediate crude jumped nearly 10% to around $105 per barrel on Tuesday, its highest level since July 2014, while international benchmark Brent crude gained 8.3% to trade at over $106 per barrel.
The International Energy Agency held a meeting with energy officials from around the globe on Tuesday to discuss how IEA members “can play a role in stabilizing energy markets,” with member countries agreeing to release 60 million barrels of oil from their strategic reserves to help offset the impact of the Russia-Ukraine conflict.
While the United States and Western allies have now unleashed severe economic sanctions against Russia for its military aggression, most countries have so far been reluctant to target the country with tough energy sanctions.
Analysts fear that if Russia’s energy exports get disrupted, either due to a prolonged conflict with Ukraine or a new round of harsher Western sanctions, then global energy markets could face a supply shock, as Russia is the world’s second-largest oil producer and a major natural gas provider for Europe.
Canada on Monday became the first country to target Russia’s energy markets directly by banning oil imports, and although other Western allies are yet to follow suit, signs of disruptions in Russian oil exports are already showing, according to analysts.
“Current oil price differentials are reflecting a clear unwillingness to take Russian crude,” JPMorgan said in a note to clients Tuesday, adding that “key European financiers to commodity trade houses have already begun curbing financing for commodities trades, and Chinese banks are also pulling back.”
Key Background:
Oil prices first surged above $100 per barrel last Thursday when Russia officially began its invasion of Ukraine. While there have so far been limited sanctions on Russian energy exports, several major oil and gas companies including BP and Shell have recently announced plans to exit Russian operations. U.S. stocks have swung wildly amid the geopolitical uncertainty, with the benchmark S&P 500 down almost 10% so far in 2022. While the global economic fallout from the invasion will likely remain “modest,” according to Moody’s Analytics chief economist Mark Zandi, “it will be a different story for the Russian economy, which is set to take a massive hit” from Western sanctions. The Russian ruble sank to an all-time low against the U.S. dollar on Monday, and the Moscow Stock Exchange remained closed for a second day in a row, with experts warning that Russia is “increasingly uninvestable for global investors.”
What To Watch For:
If Russian exports of oil and natural gas are halted altogether—for whatever reason—“it is plausible under this scenario that oil prices will spike closer to $150 per barrel,” Zandi predicted on Monday. Even if oil prices stay at $100 per barrel for a “sustained” period of time, that could end up costing U.S. consumers some $80 billion more at the gas pump, he estimates. Some of that impact is already being felt by Americans: The national average for a gallon of gas currently stands at $3.619—up 24 cents from last month, according to data from AAA.
Crucial Quote:
“The fragile situation in Ukraine and financial and energy sanctions against Russia will keep the energy crisis stoked and oil well above $100 per barrel in the near term and even higher if the conflict escalates further,” Louise Dickson, senior oil market analyst at Rystad Energy, said in a recent note.
Tangent:
Morgan Stanley also raised its near-term forecast for oil prices, with the events in Ukraine introducing a “risk premium” that is “likely to remain in coming months.” The firm now sees Brent crude averaging $110 per barrel in the second quarter, up from a previous forecast of $100.
Further Reading:
Russia’s Invasion Of Ukraine Has Sent Energy Prices Soaring—Here’s How High Oil Could Rise (Forbes)
Russia Stock Market Crash Intensifies—BlackRock Warns Investors Of ‘Significant Declines’ (Forbes)
