Oil prices storm to near decade highs before talk of Iran deal calms waters
Oil prices ran rampant this morning, nearing $120 per barrel amid heightened supply fears, with buyers shunning Russian crude as the West toughens up its sanctions.
In an increasingly volatile market, Brent Crude prices peaked at $119.84 – it highest levels since 2012 – before dropping back to $114.60 later in the session.
WTI Crude told a similar tale, hitting a high of $116.57, its loftiest levels since 2008, before retreating to $112.30.
Benchmarks remain elevated and well above the $100 milestone, with reports of severe disruption in Russian oil exports, as traders try to avoid becoming entangled in sanctions.
These anxieties have been aggravated by the latest data from the States suggesting US crude stockpiles are also at multi-year lows, alongside medium-term issues such as continued undersupply from OPEC and its allies (OPEC+) and rebounding post-pandemic demand.
Sentiment shifts in line with fresh sanctions
The gains on both major benchmarks have been powered by a fresh round of US sanctions targeting Russia’s oil refining sector.
The White House unveiled new export curbs yesterday, and targeted Belarus with sweeping restrictions, as the Biden administration bolsters its crackdown on both countries following invasion of Ukraine.
The announced plans will restrict the export of specific refining technologies, making it harder for Russia to modernise its oil refineries.
Although the West has stop short of sanctions on Russian oil and gas supplies – the latest measures are increasingly influencing market sentiment towards Kremlin-backed commodities.
Meanwhile, the UK continues to accept Russian supplies of oil and gas. but has now closed off access to Russian cargoes and vessels,
Urals listed oil was trading at an $18 discount to Brent Crude on Wednesday, while sources told news agency Reuters that at least 10 tankers failed to find buyers.
Oil trader Trafigura was also unable to find a buyer for a shipment of Sokol oil, even though the price premium versus Dubai was lowered significantly.
Commerzbank analyst Carsten Fritsch explained: “Even without direct sanctions, more and more market participants are unwilling to buy Russian oil. Even a record-high discount on Urals vis-à-vis Brent does not appear to be reviving any buying interest.”
Oil prices – how high could prices go?
Russia competes with Saudi Arabia for the title of biggest crude oil and refined oil products exporter, with shipments of more than seven million barrels per day (bpd), about half of which go to Europe.
Consequently, disruption caused by the latest measures has raised expectations of oil prices amid from market disruption.
Chris Wheaton, analyst at investment bank, Stifel, has warned the oil prices could reach $200 per barrel if Russia is cut off by the West from global oil markets.
He explained: “With the US Government indicating the sanctions on Russia’ oil industry are ‘on the table’ we look at whether the global economy could stop importing Russian oil. We conclude that it can’t – or at least, the cost could be oil at $200 per barrel, as it would take all of global spare oil production capacity, the return of more Iranian oil in the market, a ramp up in drilling in the US shale industry, and demand destruction from high prices, to replace Russia’s 7-7.5m barrels per day contribution to global oil supply”
Rystad Energy suggested prices could reach $130 per barrel .
Chief executive Jarand Rystad explained: “We expect that Russian oil exports will plunge by 1m bpd from the indirect impact of sanctions and voluntary actions by companies. Oil prices are likely to continue to climb – potentially beyond $130 per barrel.”
Australia’s ANZ has also raised its short-term target for oil – anticipating prices could hit $125 a barrel.
Alongside supply shortages caused by conflict and sanctions, the US has reported further declines in its inventories this week, with strategic reserves dropping to their lowest levels in nearly 20 years .
OPEC+ has also consistently failed to reach increases in its output targets.
The organisation has decided to maintain an increase in production by 400,000 bpd in March – a relatively modest figure compared to surging prices.
However, with multiple members persistently missing production quotas, it is questionable whether it will supply oil in line with renewed commitments.
UBS has argued that OPEC+ has limited capability the offset high prices due to shortening oil stocks – which would have been further cut as there is no sign of rebounding demand.
This has made members of the organisation increasingly cautious in a volatile market.
In a note, the investment bank said: “Dwindling OPEC+ spare capacity is making it very challenging for the group to offset any supply disruption.”
However, action from the International Energy Agency has also struggled to weigh down prices – despite the US and multiple members of the organisation committing to releasing 60-70m barrels oil.
Late stage Iran-US talks buffer price momentum
Prices dipped later in the day following growing expectations of an imminent deal between Iran and the US to revive the 2015 nuclear deal.
Negotiations to revive the pact have been going on for 10 months in Vienna, and diplomats are now believed to be in the final stage of talks.
US President Joe Biden is increasingly desperate to drive down the cost of oil ahead of the US mid-terms and mitigate the country’s cost of living crisis.
Talks are likely to continue over the course of today, the head of the International Atomic Energy Agency reportedly visiting Tehran on Saturday.
Oil minister Javad Owji revealed that Iranian oil production capacity can reach its maximum less than two months after a nuclear deal is reached,
The country’s sits on the world’s fourth-largest oil reserves, but its crude output has dropped since the US sanctions on its economy in 2018, when former US President Donald Trump exited a 2015 nuclear deal.
Nevertheless, while Iranian oil stocks could initially weigh down prices – it is unlikely to compensate to disruptions to Russian supplies.
RBC Capital analyst Helima Croft explained: “While some remain transfixed with the idea that an Iran agreement will provide much needed relief from rising oil prices, we again caution that the deal is still not done and the sums entailed would simply be too small to backfill a major Russian disruption.”
Craig Erlam, senior market analyst suggested prices could also have stalled following profit taking.
He said: “What we’re probably seeing here is some profit-taking because the price has risen so far so fast. I would be surprised if upward pressure on oil prices doesn’t resume unless something fundamentally improves.”