Brent oil surged past $100 a barrel for the first time since 2014 as Russia’s dramatic escalation of the Ukraine crisis sparked fears of a disruption to the region’s critical energy exports.
Futures in London jumped as much as 3.3% after a report that President Vladimir Putin has decided to conduct a special operation to “protect” the Donbas region before falling back below the key threshold. Putin announced this week he’d send “peacekeeping forces” into the two separatist regions recognized by Moscow, heightening fears among western governments of a full-blown invasion of Ukraine.
Russia is a key supplier of energy to global customers, with Europe relying on the nation for about a quarter of its oil supplies and a third of its gas.
The escalation spooked a market that was already under stress, as oil supplies around the world fail to keep pace with the vigorous recovery in demand from the pandemic. The OPEC+ coalition led by Saudi Arabia is struggling to restore production quickly enough, prompting some of the biggest market players to warn of an increasingly tight market.
Oil prices are likely to average $110 in the second quarter as tensions over Ukraine continue to escalate, said JPMorgan Chase & Co. this week. The crude market is likely to see sustained higher prices in the next quarter, before retreating to average $90 at the end of the year, it said.
The Biden administration is considering tapping its emergency supply of oil again in coordination with allies to counter a surge in prices brought on by Russia’s moves against Ukraine. The White House earlier announced sanctions on some Russian banks, sovereign debt and elites.
Crude’s return to triple digits completes a prodigious recovery -- barely imaginable a year ago -- as the market flips from surplus to scarcity. It reflects a global economy rushing back to normality from Covid-19 faster than it can secure supplies of raw materials of all kinds.
“As demand recovers to pre-Covid levels, supply is really having a hard time,” said Giovanni Serio, global head of market analysis at Vitol Group, the world’s biggest independent oil trader.
In addition to oil and gas, Russia is a major producer of aluminium and wheat, which Ukraine also grows. The increase in the price of multiple commodities is contributing to a surge in inflation to the highest level in decades, threatening a cost-of-living crisis for millions and forcing central banks to contemplate a phase of monetary tightening that might choke off the rebound.
“Oil prices continue to surge and are now reaching levels that are uncomfortable for consumers across the world,” Toril Bosoni, head of the International Energy Agency’s markets and industry division, said in a Bloomberg Television interview. “The oil market is incredibly tight.”
While it’s a pressing concern for all-consuming nations, the rally has been a particular source of discomfort for U.S. President Joe Biden, whose attempts to rein in soaring fuel costs ahead of this year’s midterm elections by deploying emergency stockpiles have met with little success.
Biden has pledged to “work like the devil” to get fuel costs under control, stressing the importance of energy security during a recent call with Saudi King Salman bin Abdulaziz.
The OPEC+ alliance led by Saudi Arabia and Russia is at the heart of the supply crunch. Besides Riyadh and its Gulf neighbours, under-investment and unrest are preventing several members from reviving output halted during the pandemic. The group delivered only 70% of last month’s scheduled boost, according to the IEA.
Their shortcomings are creating a further source of anxiety: that the spare capacity left to fill in for any disruptions -- whether deeper losses in conflict-torn Libya or from further drone strikes in Abu Dhabi -- has dwindled to dangerously low levels.
“I’m not necessarily thinking that OPEC is in control of things anymore,” said Torbjorn Tornqvist, chief executive officer of commodity-trading house Gunvor Group Ltd. “We’re back in a situation where we’re watching what the spare capacity is going to be.”
Supply constraints go beyond the Organization of Petroleum Exporting Countries and its partners. Investment in new supplies worldwide has contracted as a result of the Covid slump and a diversion of capital away from fossil fuels toward renewable energy. In the U.S., once-prolific shale explorers have reined in spending to pay back shareholders.
“Under-investment in the oil and gas industry was exacerbated by Covid, but already preceded Covid” in part because of the energy transition, said Vitol’s Serio.
It even extends beyond oil, across the full spectrum of energy derivatives and commodities markets. More raw materials are commanding a premium for prompt deliveries -- a condition known as backwardation -- than at any point in the past two decades, according to Bloomberg calculations.
“We’re out of everything -- I don’t care if it’s oil, gas, coal, copper, aluminium, you name it, we’re out of it,” Jeff Currie, head of commodities research at Goldman Sachs Group Inc., said in a Bloomberg TV interview. “I’ve been doing this 30 years and I’ve never seen markets like this.”
This creates a profound dilemma for Western powers. Imposing a financial cost on Russia for its actions in Ukraine, for example by putting sanctions on oil and gas exports, could cause just as much pain for their own economies.
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