Global benchmark Brent and U.S. crude futures have soared over 15% to around 10- and 14-year highs, respectively, since Russia invaded neighboring Ukraine last week. The benchmarks closed on Thursday at USD 110.46 a barrel and USD 107.67, respectfully.
Though global powers have unleashed a slew of sanctions that have so far stopped short of targeting Russian oil and gas exports , companies are avoiding Russian oil – tightening a market that was already struggling to keep up with demand that has roughly rebounded to pre-pandemic levels.
In recent days, Wall Street strategists have been boosting their expectations for the peaks crude benchmarks will have to scale to eventually cause businesses and consumers to curtail consumption.
On Thursday, JP Morgan analysts said Brent would have to rise to USD 120 a barrel “and stay there for months to incentivize demand destruction.”
What is more, the bank says if disruption to Russian volumes lasts throughout the year, Brent could end 2022 at USD 185 a barrel, likely causing demand to fall by about 3 million barrels per day (bpd).
“At these price levels, it affects demand, but that takes time and we went into this already with a tight oil market – there’s not a lot of slack in the system,” said Daniel Yergin, author and vice chairman of S&P Global.
Global consuming nations have tried to ensure adequate oil supply following the sanctions on Russia, which exports 4 million to 5 million bpd of crude, second-most worldwide behind Saudi Arabia. On Tuesday, the International Energy Agency said it would release 60 million barrels of oil from emergency reserves.
The market shrugged off that news as the release amounts to less than a day’s global consumption, and oil prices continued their upward march after the announcement.
“Supply elasticity is no longer relevant in the face of such a potential large and immediate supply shock,” said Goldman Sachs in a note Tuesday.
So far, there has been little evidence of demand destruction in the United States, the world’s largest oil consumer. Motorists tend to become wary about filling up their cars when gasoline reaches USD 4 per gallon. The current national average is USD 3.73 per gallon, according to the American Automobile Association.
“I do think when we see USD 4 a gallon, there may be an adverse reaction,” said Patrick De Haan, head of petroleum analysis at GasBuddy. “But with a strong economy and prices that remain well below inflation-adjusted records, it doesn’t have the same sting.”
RBC’s senior analyst Mike Tran said that when adjusting for inflation, the USD 4-per-gallon price reached in 2008 would be equal to about USD 5.20 in today’s dollars.
“The next frontier of oil prices will be defined by prices in search of demand destruction, and that is as bullish a framework gets,” Tran said in a Wednesday note.
The Organization of the Petroleum Exporting Countries and their allies including Russia have decided to maintain an increase in output by 400,000 barrels per day in March despite the price surge, ignoring the Ukraine crisis during their talks and snubbing calls from consumers for more crude.
The basket of crude oil India buys rose above USD 102 per barrel on March 1, the highest since August 2014, according to information from the Petroleum Planning and Analysis Cell (PPAC) of the oil ministry. This compares to an average of USD 81.5 per barrel price of the Indian basket of crude oil at the time of freezing of petrol and diesel prices in early November last year.
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