Oil prices continued to rise on Wednesday, pushing beyond $110 a barrel due to a flurry of divestments from Russian oil assets by large corporations and forecasts that the market would stay tight on supply for months to come.
Because of Russia’s invasion of Ukraine and the West’s response, which included a slew of sanctions aimed at crippling Russia’s economy, the market has seen a significant upswing, with global benchmark Brent crude rising by 11 percent only this week.
While the energy sector was not explicitly targeted by the sanctions, which were aimed at financial transactions and banks, they have had a negative impact on Russia’s ability to export oil, which ships 4 million to 5 million barrels of oil worldwide every day, more than any other country except Saudi Arabia, and has hampered the country’s exporting capabilities.
Mr. Andrew Lipow, president of Lipow Oil Associates, which is located in Houston, Texas in the United States, said that sanctions on people and financial institutions have resulted in a de facto embargo on the purchase of Russian oil by the oil industry and other government bodies.
As a result of Brent reaching its highest level since 2014 and US crude reaching a level not seen since 2011, global benchmarks have retreated from their previous highs.
Brent oil futures reached a high of $113.94 a barrel before falling to $110.58 a barrel at 1:07 p.m. EST (17:07 GMT), up to $5.61 or 5.3 percent from their previous close. West Texas Intermediate (WTI) crude futures in the United States reached a high of $112.51 a barrel on Friday, and were last up $5.05, or 4.9 percent, at $108.46 a barrel.
Both benchmarks fell after Jerome Powell, the chairman of the US Federal Reserve, said that the central bank will raise interest rates numerous times in order to keep inflation under control.
The analysts at Goldman Sachs said in a note that “demand destruction – via further higher prices – is now likely to be the sole suitable rebalancing tool.”
It seems doubtful that extra supply will be available in the near future to alleviate the situation. A short summit of the Organization of the Petroleum Exporting Countries and its allies – which includes Russia – on Wednesday confirmed that the group’s long-term goal of increasing production by 400,000 barrels per day (bpd) would be maintained.
Despite the fact that OPEC+ has raised production over the previous few months, producers are consistently falling short of their objectives, expanding a deficit that can only be bridged by drawing on existing stocks of crude.
Worldwide demand has approximately returned to levels last seen before to the coronavirus epidemic, but there is insufficient supply, leading big nations to draw on their stockpiles to make up for the deficit.
Refiners and other oil importers are trying to find other sources of supply. The price of prominent grades of crude oil sold across the globe, such as those from the North Sea and the Middle East, has reached historic highs relative to Brent.
As well, the major Russian Urals grade has been marked down to $18 below the benchmark price, and potential sellers are still seeing limited demand in Russian crude oil. Surgutneftegas, a Russian oil company, was unable to sell 880,000 tonnes of Urals oil from Russian ports on Wednesday as a result of the cancellation of many other planned sales.
The White House stated on Wednesday that it was “quite open” to the notion of targeting Russian energy and gas with sanctions, which only added fuel to the fire. According to economists, this might push prices further higher, until customers get dissatisfied with the escalating expenses.
However, Deputy Director of the National Economic Council Bharat Ramamurti said later on Wednesday that the United States government does not intend to attack the Russian energy industry for the time being.
Russia’s oil exports account for around 8% of world oil production.
The trade-in Russian oil was already in turmoil as producers postponed sales, importers refused Russian ships, and purchasers throughout the globe looked elsewhere for petroleum as a result of Western sanctions and private company pullouts, all of which put pressure on Russia.
Several global oil corporations, including ExxonMobil, BP, and Shell, have declared intentions to sell their Russian stakes in the country. On Wednesday, merchant trader Trafigura said that it has halted its interests in Russia, only one day after Exxon announced that it would cease its oil and gas activities in the country.
Meanwhile, oil stockpiles in the United States continued to drop. The tanks at the key Cushing, Oklahoma crude hub are at their lowest levels since 2018, and the United States’ strategic reserves have fallen to a level that is close to a two-decade low – and that was before another release announced by the White House on Tuesday in conjunction with other industrialized nations.
The release of 60 million barrels of oil agreed upon on Tuesday by member nations of the International Energy Agency failed to soothe the market, with oil prices rising as a result of the news.
“With a market for oil demand of 100 million barrels per day, 60 million barrels may satisfy little more than half a day’s worth of demand… It just manages to keep the market going till midday,” said Michael Tran, an analyst at RBC Capital Markets.