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Commodities Corner: Why Russia’s invasion of Ukraine could lift oil prices to a 14-year high

Russia launched a full military invasion into Ukraine on Thursday, lifting the U.S. and global crude benchmarks to intraday highs past $100 a barrel and raising the possibility of a climb in prices to their highest levels in nearly 14 years.

“Oil prices are soaring with no end in sight [on] the news of Russia’s full-scale military incursion of Ukraine, immediately putting at risk up to 1 million [barrels per day] of Russian crude oil exports transiting through Ukraine and the Black Sea,” said Louise Dickson, senior oil market analyst at Rystad Energy.

In Thursday dealings, April West Texas Intermediate crude
CLJ22,
+3.41%

CL.1,
+3.42%

tacked on $3.98, or 4.3%, to $96.08 a barrel on the New York Mercantile Exchange, after trading as high as $100.54. April Brent crude
BRNJ22,
+5.19%

BRN00,
+4.36%

traded at $102.61 a barrel on ICE Futures Europe, up $5.77, or nearly 6%.

Read: Ukraine invasion sends wheat, corn and oil soaring because Russia is a ‘commodity superstore’

“War has come to the heartland of Europe, and if the Ukraine conflict draws in the might of the Russian army and other interested and well-equipped forces, unconstrained upside risk to regional geopolitics and oil prices are highly likely in the near term,” said Dickson, a note Thursday.

She said prices could approach $130 by June if the Ukrainian conflict disrupts Russian crude flows, and prices would soar even higher “if additional disruptions materialize.”

WTI and Brent crude prices haven’t traded at $130 since July 2008, FactSet data show, when global supply and demand concerns led to a rally.

Russia is the third largest producer of oil in the world, after the United States and Saudi Arabia, according to data from the U.S. Energy Information Administration, which pegged its production level of petroleum and other liquids at 10.5 million barrels a day, or about 11% of the world total.

“The ramifications on the global energy markets are immense and the moves in oil and gas prices” Thursday, in addition to those seen in recent weeks, “go some way to reflect this,” analysts at commodity data and analytics firm Kpler wrote in a market update.

“There is no doubt that heavy sanctions will surely follow,” they said. “Considering the near-zero likelihood of foreign troops coming to the direct aid of Ukraine, there will likely be nothing left off the table when it comes to what financial and economic tools can be used.”

President Joe Biden was expected to delivery a speech Thursday afternoon that will detail what White House officials described as harsh economic penalties, according to The Wall Street Journal.

Russia’s crude benchmark, known as the “Urals” oil grade, were trading at a $9.80 a barrel discount to Brent crude as of late Thursday morning as buyers are “wary of holding Russia crude that may end up being sanctioned,” said Rebecca Babin, senior energy trader at CIBC Private Wealth US.

Still, “the fact that behaviors have changed ahead of the next round of sanctions leads me to believe the market will not be overly surprised by sanctions that impact the financial institutions that facilitate some Russian crude exports and make Russian crude (Urals) more difficult to sell,” she told MarketWatch.

At least three major buyers of Russian oil have been unable to open letters of credit from Western banks to cover purchases given the uncertainty tied to Russia’s invasion of Ukraine, Reuters reported Thursday, citing four trading sources. Letters of credit from the bank guarantee the seller’s bank that payment will be made in full and on time. Top Russia oil buyers include BP
BP,
-7.47%

and Shell
SHEL,
+0.49%
,
Reuters said.

The “most extreme” of potential sanctions would be to exclude Russia from the SWIFT international payment mechanism, said Babin. “That would completely isolate Russia financially and likely incite Putin to completely halt energy flows to Europe.”

Read: Here are the new U.S. sanctions that Russia could face now that Putin has launched invasion of Ukraine

“This nuclear option is not currently priced into the market would likely drive commodity prices broadly drastically higher,” she said. 

On thing for sure is that “any disruption to Russia oil production volumes will need to be mitigated by higher production volumes from the [Organization of the Petroleum Exporting Countries] and/or the U.S.,” said Rob Thummel, senior portfolio manager at Tortoise, told MarketWatch.

OPEC and its allies, which together are known as OPEC+ and include Russia, will hold their next meeting on Wednesday to decide on production levels for April.

Despite Russia’s full invasion into Ukraine, analysts still believe the group is likely to continue its plan to increase output by 400,000 barrels per day.

See Barron’s story on OPEC+ meeting

Babin, however, pointed out the potential for a coordinated release from the Strategic Petroleum Reserve, as well as a possible nuclear deal with Iran could help “contain the crude rally.”

Talk of a release from the U.S. SPR has intensified as the Biden administration seeks ways to ease the rising price of gasoline at the pump.

Read: U.S. drivers brace for the highest gas prices in 9 years as oil approaches $100 a barrel

A release of oil reserves offer “short-term relief,” while Iran has over 100 million barrels of oil in floating storage available and if a deal is reached, that market would likely see 500,000 barrels back on the market “fairly quickly,” she said.

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