U.S. oil prices were above $105 a barrel on Tuesday.
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Oil prices were jumping to new multiyear highs on Tuesday as pressure built around the world to isolate Russia. But the current dynamics in energy could soon get even more fraught—and send prices even more sharply higher.
Meetings and speeches over the next 24 hours could determine if oil skyrockets further. Tuesday’s market action makes it clear that traders don’t expect a quick and painless resolution to the Ukraine conflict.
Even news released late Tuesday morning that the U.S. and oil-consuming members of the International Energy Agency will release 60 million barrels of oil from strategic stockpiles didn’t tamp down the price rally. While the group said it would “send a unified and strong message to global oil markets that there will be no shortfall in supplies as a result of Russia’s invasion of Ukraine,” the market clearly sees otherwise. It’s simply not enough to really move the needle on oil prices.
The U.S. Strategic Petroleum Reserve will account for 30 million barrels – or less than 5% of the total reserves. Other nations involved include Japan and the United Kingdom. About 100 million barrels of oil a day are produced globally.
On Tuesday, Brent crude futures, the international benchmark, were up 9%, to $106.75 a barrel. West Texas Intermediate crude, the U.S. benchmark, was up 10%, to $105.64 a barrel.
Oil stocks rose, but without much conviction. Exxon Mobil (ticker: XOM) was up 1.2% and producer EOG Resources
(EOG) rose 0.7%. Chevron (CVX), which raised its buyback guidance at its investor day, was up 2.8%.
One of the biggest questions hanging over the market now is whether OPEC and its allies, which include Russia, will increase production to try to hold down prices. OPEC+, the name of the expanded group, will be meeting on Wednesday to discuss whether to continue with their plans to bring back a cumulative 400,000 barrels worth of oil production to the market. The Biden administration has asked Saudi Arabia to increase production to keep prices low, but there is little indication so far that the message is changing the kingdom’s strategy. In addition, analysts are skeptical that most OPEC members can even increase production, because they haven’t been spending enough money on finding new reserves or expanding current projects.
“A number of OPEC producers are simply tapped out,” said RBC Capital Markets analyst Helima Croft.
A report from OPEC’s Joint Technical Committee said that OPEC+ had fallen short of its production allocation by 972,000 daily barrels as of January, according to Reuters. That production shortfall makes it clear that OPEC is probably not coming to the rescue of the market by adding to supply.
“They have miraculously turned a market control system meant to control prices from a bearish situation into a bullish price situation,” said Robert Yawger, director of energy futures at Mizuho Securities.
In the U.S., President Biden is expected to give his State of the Union on Tuesday and could announce new sanctions against Russia, perhaps even directly targeting its energy exports.
Analysts, however, doubt that Biden will target energy in the speech, in part because he is going to be focused on curbing inflation of things like gasoline. That doesn’t mean energy sanctions aren’t possible, but they may come later, depending on whether Russia escalates the fighting even more.
For now, the current sanctions appear to be curbing Russian energy exports even if the U.S. and other countries have explicitly excluded energy from them.
“Key European financiers to commodity trade houses have already begun curbing financing for commodities trades, and Chinese banks are also pulling back,” J.P. Morgan strategist Natasha Kaneva wrote in a note. “Current oil price differentials are reflecting a clear unwillingness to take Russian crude.”
A decision on a full Russian oil embargo will largely depend on the intensity of the fighting in the coming days. If a full embargo is passed, oil prices are likely to ratchet higher.
“Regardless, in the event of a full embargo on Russian oil, potential sources of incremental supply in the coming months (Strategic Petroleum Reserve, Iran, higher U.S, production) aren’t enough to offset a prolonged loss of Russian volumes,” Kaneva wrote. “Under such a scenario, demand destruction will likely act as a balancing mechanism of last resort.”
In that case, analysts expect prices to rise to $120 and beyond—perhaps even as high as $150.
Write to Avi Salzman at [email protected]
