Oil futures could climb to well above $100 a barrel if the escalating tensions between Russia and Ukraine turns into a full-blown war, which appears likely, said a number of analysts on Tuesday.
Russia’s drums of war sent jitters through the futures markets Tuesday morning but hit a wall in the afternoon. At one point, US crude surged to $96 a barrel, Brent to $99.50 a barrel and natural gas to $4.86MMBtu.
Russian troops entered the two Ukrainian breakaway regions of Donetsk and Luhansk hours earlier, a move that signals a potential crisis for Europe’s oil consumers.
On Monday evening, Russian President Vladimir Putin announced Russia would recognise the independence of Donetsk and Luhansk.
Oil futures could hit triple digits soon, said Andrew Lipow, president of Lipow Oil Associates.
“Until we see a greater impact to the demand side of the equation or the return of Iranian oil to market, crude oil prices will remain at these lofty $95-plus levels, and they will hit more than $100 if Russia invades. Could they go higher - yes,” Lipow told Capital.com.
Oil could spike to $110 - $115 per barrel if the crisis worsens, he warned.
The US and European markets are already tight because of a number of simultaneous crises, Richard Bronze, senior analyst at Energy Aspect told CNBC and confirmed to Capital.com.
The markets were already “more sensitive to geopolitical risk than we would be in a well-supplied or over-supplied market,” before the Ukrainian crisis, he said.
Russia is a petroleum state, so it doesn’t have much economic leverage.
On Monday evening, Putin ordered forces into two breakaway regions of eastern Ukraine. In a televised speech, Putin announced Russia would recognise the independence of Donetsk and Luhansk, a statement signalling a potential crisis for Europe’s oil consumers.
Prior to the pandemic, Europe consumed nearly 15 million barrels a day of petroleum products while producing around only 4 million barrels per day. Russia supplies about 20% or 3 million barrels a day of the continent’s oil consumption.
The southern leg of one of the world’s largest transporter of oil, the Druzhba Pipeline, travels through Ukraine carrying about 240,000 barrels a day of crude oil to refineries in Czechia, Slovakia and Hungary.
Bronze said given the size of Russia’s economy, smaller than Italy’s or Canada's, means it has no economic leverage and “can ill afford a long period of much lower energy prices and cannot divert all the gas and oil it sells into Europe.”
Sources told Capital.com that Russia could increase its exports to China, which would not purchase the amount Europe does or pay the same price given transportation cost.
The US imports more than 700,000 barrels of Russian oil daily, the majority of which are tagged for the East Coast.
In the first 11 months of 2021, the US imported more than 8% of its daily usage from Russia, according to the EIA.
Meanwhile, the US is importing nearly 500,000 barrels per day of refined product from Russia, 367,000 barrels are unfinished oils needing to be upgraded at US refineries, mostly located along the Gulf Coast.
“Bottom line is that the USA would feel some impact from the loss of supplies from Russia, but we are in a far better position than Europe,” said Lipow.
A major source of natural gas for Europe is Russia. However, with a month left of winter, Europe is threatening to place sanctions against the two breakaway regions.
Dmitry Medvedev, deputy chair of Russia's Security Council, warned that action against the pipeline would result in higher natural gas prices for Europeans.
Additionally, the 764-mile Nord Stream 2 pipeline that was slated to carry natural gas from Russia to Germany is on hold after Russia’s bellicose action.
German Chancellor Olaf Scholz previously stopped short of suspending the project as tension heightened, but on Tuesday he directed Germany’s economy minister to withhold certifications. The pipeline, which is completed, was expected to come online later in 2022.
“There has been a dramatic change in the situation, and we must now reassess,” he tweeted. “I have asked our Economic Affairs Ministry to conduct a new analysis of the security of the energy supply. Under the present circumstances, certification is not possible.”
In the US, President Joe Biden praised the chancellor’s action during a press briefing Tuesday afternoon.
Would LNG fill the gap?
Russia’s move has reignited Europe’s debate if Liquified Natural Gas could be a more permanent solution to the continent’s dependence on Russia.
In the short term, “LNG would not be able to fully compensate for any natural gas shortfall from Russia” a client note from Germany’s Commerzbank reads, citing “a lack of free short-term capacity among exporters like the US and Qatar.”
The bank said that though Europe still has the capacity to process or regasifiy the imported liquid gas, “it would be difficult to deliver it to end-users as the distribution infrastructure is not tailored for a significant shift to LNG.”
The New York Times reported Sunday, the US government held talks recently with several international energy firms to discuss contingency plans for delivering gas to Europe if Russian supplies were disrupted.
The newspaper cited two industry insiders who said the US State Department approached companies asking where additional supplies might come from if required.
With tight global supplies at present, the officials were told that there is little gas available to substitute large volumes from Russia, the newspaper reported.
Without other natural gas or LNG exporters stepping up, Europe may struggle to compensate for any temporary lack of Russian supplies in a worst-case scenario, the note read.
David Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business, said if three Middle East countries increased their output it would help the markets.
According to the Joint Organisation Data Initiative (JODI), a database of energy statistics, Saudi Arabia’s oil production in January 2022 was 10.02 million barrels per day. JODI believes that Saudi Arabia has the capacity to produce 12 million barrels per day.
OPEC data shows UAE oil production was 2.92 million barrels a day last month and has the capacity to produce 4.2 million barrels per day.
The cartel also said Kuwait’s oil production in January 2022 was 2.58 million barrels per day but has the capacity to produce 3.15 million barrels per day.
If Russian crude supplies were shut off from Europe, these three countries have the capacity to make up for the shortfall, Kass told Capital.com
However, he added, it is unclear if they would as Russia is a member of the OPEC+ group of producers.
The Saudi oil minister said over the weekend, the cartel’s nations must stay together for the long-term stability of the oil market.
Threats of sanctions
During Biden’s news conference he announced broad sanctions against a major Russian Bank VEB and its military financial institution.
Additionally, the president said the US would implement comprehensive sanctions against the nation’s sovereign debt.
“That means we’ve cut off Russia’s government from Western financing,” Biden said. “It can no longer raise money from the West and cannot trade its new debt on our markets, or European markets either.”