A general view shows the Marathon Petroleum oil refinery, after the Russian invasion of Ukraine, in Anacortes, Washington, March 9, 2022.
David Ryder | Reuters
Oil prices are rocketing again and are expected to see more sharp peaks and sudden dips as the world faces potential supply shortages.
For consumers, that means a longer run of expensive gasoline — with prices at the pump staying above $4 a gallon. That means more inflation for the economy. In addition to consumer pressures, there will be higher costs across the board for any business that depends on petroleum — from airlines and truck drivers to chemical companies and plastics manufacturers.
The Russian invasion of Ukraine came at a time when oil prices were already soaring on tight supplies and growing demand from reopened economies. Now, the loss of much of Russia’s 5 million barrels a day exports has put additional pressure on prices.
“I remain constructive on oil because I see no immediate shutdown to the war in Ukraine. Market participants have consistently given Putin the benefit of the doubt about his alleged willingness to negotiate, but we think we should pay attention to his actions not his words said Helima Croft, head of global raw materials strategy at RBC.
Oil rose more than 7% on Monday as the European Union considers joining the US in an oil embargo and after Saudi Aramco facilities were attacked over the weekend by Iran-affiliated Houthi rebels in Yemen.
Analysts also recognize that the price could fall suddenly, especially if there were a solution to the Russian attack on Ukraine.
“The range of results in any given two week period is broad. We went from $90 to $130 a barrel in a month. We went from $125 to $95 in a week, and that’s going to be the normal type of volatility. $10 a week is nothing, 10% moves nothing,” said Daniel Pickering, chief investment officer of Pickering Energy Partners.
Pickering said the market feared trading again on Monday.
“You don’t want to take higher prices off the tables in terms of opportunities, but I think what we saw is there’s a fear of something and right now it’s the fear of actions around Russian barrels and that’s going to create a lot of volatility,” he said. “When it becomes reality, I think you’ll have a bias higher than these levels. You’ll be putting $130 back in the game if we actually start canceling Russian barrels.”
Pickering estimates that 2 million to 3 million barrels of Russian water-based oil per day are frozen from the market, with no direct buyers. He said China and India continue to buy Russian crude. “I’m sure there will be others on the fringe who want to take more over time,” he said.
Pickering said he does not predict a return to $130 a barrel of oil, but added that it could happen. West Texas Intermediate crude oil futures for April were up 7% Monday to $112.12 a barrel.
Francisco Blanch, head of commodities and derivatives at the Bank of America, said the US market is set for periodic price spikes.
He said in a note that limited production growth and strong refining and export demand are causing tight supplies at the US Cushing storage facility in Oklahoma. That is a central oil facility for crude oil that is traded in US futures contracts. The lack of storage there could lead to more volatility in the futures market, as the holder of a futures contract has to physically surrender when the contract expires.
In April 2020, that convergence led to 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 opposite could cause price spikes during expiration as investors try to buy, Blanch noted.
The April contract expires on Tuesday. “As the market is desperately short of barrels in the near term, we see an increased risk of a short squeeze as WTI moves towards expiration each month,” said Blanch.
The European Union is expected to discuss a ban on Russian crude oil, but there is disagreement among members. Talks are underway this week between EU governments and President Joe Biden in a series of summits aimed at hardening the response to the Russian invasion.
“I think the prospect of sanctions or an embargo on Russian oil in Europe is really rising, and the pressure will build over the course of the week,” said Dan Yergin, vice president of IHS Markit.
“But it needs to be done carefully and in close consultation with the industry to minimize this disruption,” Yergin said.
Croft said she is skeptical that Europe will agree to a ban. Europe is Russia’s largest export market for both oil and natural gas.
“I still think Germany will block any attempt by the EU to impose energy sanctions so that the economic lifeline offered to Putin by oil and gas sales will continue,” 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 would follow.
“The brutality of his military campaign will likely mean that sanctions will persist for the foreseeable future and Russia will remain a toxic asset,” she said. “I think we should pay more attention to Congress because it could move to impose secondary sanctions that would essentially force Germany’s hand on this matter.”
Oil facilities in Saudi Arabia were attacked last weekend by Iran-affiliated Houthis. The missiles and drone strikes were fired at a water desalination plant, a liquefied natural gas plant, a power plant and a gas facility. Aramco said there were no impacts on supplies.
“The Saudis are using this Houthi attack as a cover to say they are absolving themselves of any responsibility for supplying the oil market because of the attack,” said Again Capital partner John Kilduff. He noted that Saudi Arabia’s relations with the US have been tense during the Biden administration.
“The Saudi refusal to add to the offer is exacerbating the pricing problem for consumers around the world, while exacerbating the pricing problem for consumers around the world,” Kilduff said.
Saudi Arabia is a leading member of OPEC+, which includes other OPEC producers and Russia. The group agreed to put 400,000 barrels per day on the market every month until June. OPEC+ did not indicate at its last meeting whether it would consider adding more barrels.
Saudi Arabia has kept quiet about the invasion and has not promised to bring more oil to the market than its previous plans. British Prime Minister Boris Johnson visited the kingdom last week, and US Secretary of State Antony Blinken is also expected to visit.
“Saudi Arabia remains firmly committed to the OPEC+ easing formula. Boris Johnson returned to London empty-handed and now with the ramped up Houthi attacks on energy infrastructure, the kingdom is warning it may not be able to cope with the current maintain production levels,” said Croft. †
Yergin said it would be difficult for Saudi Arabia to break with the OPEC+ partnership. “The OPEC+ partnership was really a Saudi/Russian deal and before all this started, it was a source of stability for the market,” Yergin said. “Since the 2014 price drop, their goal had always been to bring Russia to an agreement rather than expose Russia as a competitor. Their relationship has deepened and they have become strategic partners.”
Yergin said the relationship has been established 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 tighten,” Pickering said. “I don’t think they feel hugely compelled in the short term. I think there’s a lot of game art going on… I think there’s a dynamic that says OPEC’s production will continue higher, but not necessarily with the speed that Europe and the US want.”
Other Supply Sources
The US is looking for other sources of supply, including possible barrels from Venezuela, which are subject to sanctions.
The market had expected a deal with Iran that would allow it to return more than 1 million barrels per 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 in more oil, but their contributions are not expected to be much greater than the additional 900,000 to 1 million barrels per day already expected for this year.
Several oil executives gathered at the White House on Monday.
“I don’t think the industry feels hugely compelled to act. There’s price volatility. There’s an unexpected income tax discussion,” Pickering said. “We need to see if the government will supply carrots. They certainly supplied sticks, but I don’t think sticks will work.”
Correction: Antony Blinken is the United States Secretary of State. An earlier version misspelled his name.
This post Oil is likely to remain volatile and expensive as the world faces inventory shortages
was original published at “https://www.cnbc.com/2022/03/21/oil-is-likely-to-remain-volatile-and-expensive-as-world-deals-with-supply-shortages.html”