Fears of long-term supply disruption over Ukraine conflict push oil prices higher again

Oil prices rose for the fourth consecutive day on Friday as Russia’s invasion of Ukraine triggered global energy supply concerns and markets braced for the potential impact of crippling trade sanctions on Moscow.

Global benchmark Brent crude rose $2.72, or nearly 2.75 percent, to $101.80 a barrel around 0347 GMT on Friday, after climbing to as high as $101.87. On Thursday, Brent went up to $105 a barrel, the highest since 2014, before paring gains by the close of trade as the Russian attack on Ukraine unfolded.

US West Texas Intermediate (WTI) crude touched a high of $95.64 on Friday, and was up $2.70, or 2.9 percent, to $95.51 a barrel.

The coordinated Russian military operation by land, sea and air is the biggest attack on a European state since the Second World War and has prompted tens of thousands of people to flee their homes.

In response to the invasion, US President Joe Biden hit Russia with a wave of sanctions on Thursday, measures that the White House said would impede Russia’s ability to do business in major currencies. There were also sanctions against banks and state-owned enterprises.

Britain, Japan, Canada, Australia and the European Union also unveiled more sanctions on Moscow on Thursday, including a move by Germany to halt an $11 billion gas pipeline from Russia.

Even though Biden left out the energy sector from direct sanctions against Russia, analysts and traders said they expected a major market impact.

“Full-scale military conflict between Russia and The West is unlikely, but a deep economic war is almost inevitable. Russia cannot win an outright economic war, but it does have a major weapon to wield – oil and gas exports. Demand for oil and gas in The West is only rising, and a global energy crisis is likely to unfold,” Jarand Rystad, the CEO of Rystad Energy, wrote in an extraordinary note on Friday.

“The escalation immediately jeopardises up to 1 million bpd of crude supplies that transit through Ukraine and the Black Sea, but the long-term disruptions could be far more significant. Rystad Energy’s simulations show that oil prices could surge to around $130 per barrel… The reality is that significantly higher prices are on the horizon in Europe and overseas,” Rystad added.

On Thursday, Biden said at a press conference that the White House was taking proactive steps to bring down energy prices, and warned US oil and gas companies not to exploit the situation to hike prices.

The US sanctions currently allow all energy payments to continue, and energy supplies are being monitored for disruption, Biden said. The US was working with countries around the world “to elevate the collective release” of strategic petroleum reserves, he said, pledging that the US will also release additional barrels of oil as conditions warrant to calm the market.

A senior US official separately reiterated to reporters on Thursday that its sanctions “are not targeting and will not target oil and gas flows”.

But the price jitters were clearly visible in early Asian trade on Friday, with fresh reports on aerial attacks and explosions emerging out of the Ukrainian capital, Kyiv.

“Asian buyers, clearly nervous into the weekend, have piled into oil today sending prices higher once again, helped along by reports of explosions in Kyiv,” Jeffrey Halley, senior market analyst at OANDA, told Reuters.

“The Ukraine situation will serve to keep prices elevated, as will the threat of disruptions, real or imagined, coming in an environment of already strong demand and constrained supply globally... I believe Brent crude will now trade in a $90-110 range over the next few weeks,” Halley estimated.

Output by OPEC members in January of this year was below the planned rise under the deal with the bloc's allies, according to a Reuters survey. But Nigeria’s petroleum minister cautioned, earlier this week, that there was no need for OPEC+ to expand planned oil production as a potential deal between Iran and world powers will increase supplies.

“Oil markets are particularly vulnerable to supply shocks given global oil stockpiles are at seven-year lows,” said Commonwealth Bank analyst Vivek Dhar in a note.

Other analysts and officials said that if the conflict escalated, high energy prices would aggravate sectors and services beyond the supply shortage.

“As global oil prices continue to rise, this affects the cost of energy and logistics in the global supply chain… The tension would also affect exchange rates, travel and tourism,” Sanan Angubolkul, chairman of the Thai Chamber of Commerce, told the Bangkok Post.