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Oil is likely to remain volatile and expensive as world deals with supply shortages


This is a general view of Marathon Petroleum’s oil refining plant, after Russia invaded Ukraine on March 9, 2022, Anacortes (Washington).

David Ryder | Reuters

As the world faces possible supply shortages, oil prices continue to rise and will likely see sharper spikes than usual.

For consumers, that means a longer period of expensive gasoline — with prices at the pump staying above $4 per gallon. This means higher inflation for the economy. Besides the strain on consumers, there will be higher costs across the board for any business relying on petroleum —  from airlines and truckers to chemical companies and plastics producers.

Russia invaded Ukraine at a moment when oil prices had already risen due to tight supply and rising demand from the reopening of economies. The loss of large amounts of Russia’s five million barrels per hour of oil exports is putting additional pressure on the prices.

“I am still constructive about oil, because I don’t see any immediate ramp up to war in Ukraine. According to Helima Croft (head of RBC’s global commodities strategy), market participants continue to give Putin credit for his willingness to negotiate. However, we believe we need to pay more attention to what he does and not just his words.”

As the Monday market closed, oil rose more than 7 percent European Union considers joining the U.S. in an oil embargoAfter the attack on Saudi Aramco’s facilities, Houthi rebels from Yemen (aligned with Iran) attacked them over the weekend.

Analysts acknowledge, however that the price could collapse suddenly if Russia attacks Ukraine.

The range of outcomes within a two-week span is vast. In a single month, we went from $90 per barrel to $130. The volatility was normal. We moved from $125 per barrel to $95 within a week. $10 a week is noting, 10% moves nothing,” said Daniel Pickering,  chief investment officer of Pickering Energy Partners.

Pickering claimed that Monday’s market panic was over.

“You don’t want to remove higher price points from the tables for the possibility of, but I think we saw that there’s fear of something. At the moment it’s Russian barrels. This will create volatility,” he stated. If it becomes a reality, then I believe you are biased further from these levels. If we cancel Russian barrels, you get $130 back.

Pickering says that between 2 million and 3,000,000 barrels of waterborne Russian oil per day have been removed from the market without any immediate buyers. Pickering stated that India and China continue to purchase Russian oil. He said, “I am sure that on the margins there are others willing to accept more over time.”

Pickering indicated that although he does not expect an increase in oil prices to $130 per barrel, he could see it. West Texas Intermediate crudeFutures for April were up by 7% to $112.12/barrel Monday.

Francisco Blanch of Bank of America, head of commodities & derivatives, stated that the U.S. markets are set up for price spikes.

According to him, Oklahoma’s limited production growth combined with strong refining and export demand have resulted in tight stock levels at Cushing Storage Facility in the U.S. This is an oil storage facility that holds crude oil for futures trading in the United States. Because the futures contracts are held by futures holders, they must be physically delivered when their contract expires.

This convergence resulted in a lower price of WTI oil in April 2020 as investors had to sell their stocks at low prices. Blanch pointed out that the reverse could lead to price spikes in expiration as investors attempt to purchase.

Tuesday will be the last day of the April contract. Blanch stated that the April contract expires Tuesday because the market is in desperate short of barrels. Blanch said there was an increased chance of a short squeeze, as WTI continues to move towards expiry.

European ban

Although the European Union will likely discuss banning Russian oil, it is not expected that they would ban is disagreement among members.This week, President Joe Biden and EU leaders are meeting in talks to discuss how they can strengthen their response to Russia’s invasion.

Dan Yergin (Vice Chairman of IHS Markit) stated that he believes there is a greater chance of sanctions against Russia or an embargo on Russian Oil in Europe.

“But this needs to be done cautiously and in close consultation with industry to minimize any disruption,” said Yergin.

Croft expressed doubts that Europe will agree with the ban. Russia’s largest export market for oil and natural gases is Europe.

Croft said that “I believe Germany will still block any EU effort impose energy sanctions”, so Putin will continue to have the economic support provided by oil sales.

U.S. sanctions have been placed on Russia and its financial system, while the U.S. also banned Russian oil. Croft indicated that additional sanctions may be in the future.

She stated that “the brutality of his military campaigns will most likely mean that sanctions will stay for theforeseeable future” and Russia would remain a harmful asset. I believe Congress should be more attentive to this issue, as it may impose additional sanctions that would force Germany to take action.

Supply shortages

Saudi Arabia oil facilities were attackedOver the weekend, Iranian-aligned Houthis. Drone attacks and missiles were launched at the water-desalination plants. A power station; and a natural gas facility. Aramco claimed that the changes had not affected supplies.

John Kilduff of Again Capital stated that the Saudis use this Houthi attack to claim they are exempt from all responsibility for oil supply. He pointed out that relations between Saudi Arabia and the U.S. were strained under the Biden administration.

Kilduff stated that the Saudi refusal to increase supply “is exacerbating pricing issues for consumers around the globe they’re exacerbating pricing problems for consumers around the world.”

Saudi Arabia is a major member of OPEC+. This group includes Russia and other OPEC producers. The group committed to returning 400,000 barrels per day to the market every month from June until June. OPEC+ was silent at the last meeting. It did not indicate whether they would be open to adding more barrels.

Saudi Arabia is silent about the invading nation and hasn’t promised any additional oil. Boris Johnson, the British Prime Minister visited Saudi Arabia last week. Anthony Blinken, U.S. Secretary Of State is expected to also visit.

“Saudi Arabia will continue to adhere to the OPEC+ easing program,” Croft said. Boris Johnson went home empty handed from London, now that the Houthi-led attacks on infrastructure are intensifying, the kingdom warns it could not maintain current production levels,” Croft stated.

Yergin stated that it was difficult for Saudi Arabia not to leave the OPEC+ Partnership. Yergin said that the OPEC+ arrangement was a Saudi/Russian deal and, before this began it provided stability for markets. Since the 2014 price crash, Russia’s goal has been to enter into agreements with Russia rather than stand alone as a rival. Their relationship has grown and they have become strategic partners.

Yergin claimed that they were able to come together at the most high level – between Russian President Vladimir Putin (Russia) and Saudi Crown Princess Mohammed bin Salman (Saudi Arabia).

 “If OPEC doesn’t turn more barrels back on, the market’s going to tighten up,” said Pickering. I don’t believe they are feeling obligated in the short term. There is a lot going on here…I believe there is a dynamic which suggests that production at OPEC will continue moving higher but not with the same speed Europe or the U.S. want.”

Sources of other supply

The U.S. is looking to find other supply sources, including barrels from Venezuela that have been subject to sanctions.

In return for Iran’s agreement on ending its nuclear program, the market was expecting to see a deal. These talks fell apart in the last weeks.

The U.S. could bring more oil back, although their contribution is unlikely to exceed the additional 900,000.000-1 million barrels per day that are already anticipated for this year.

Monday saw some oil executive meet at the White House.

I don’t believe the industry is compelled by a sense of urgency to take action. Price volatility is a problem. Pickering said that there is a tax on windfall profits. Pickering said, “We must see if they are going to give any carrots. While they’ve provided the sticks, I’m not sure that it will continue to provide them with carrots.