Jaws have been dropping at the surge in oil prices since the New Year, especially on Monday. Crude oil futures rose about 3% to nearly $79 a barrel. The Biden administration’s sanctioning of two of Russia’s most significant oil producers and exporters was the latest ingredient fueling the rise in oil prices. It also sanctioned 183 Russian oil tankers, many crude oil traders who deal in Russian oil, Russian oilfield service, equipment, and technology companies, and more than a dozen leading Russian energy officials, executives, and CEOs of Russian oil producers. The sanctions fulfilled the U.S. G7 commitment to reduce Russia’s energy revenues to support Ukraine’s independence fight.
One wonders whether the oil price surge is a knee-jerk reaction to the sanctioning announcement. Thus, the question is when will prices drop back to levels reflecting the conventional view that the world is awash in oil and demand remains weaker than expected. Losing Russian oil supplies suggests the global oil market will tighten. Supply and demand coming into closer balance faster than anticipated will lift forecasted oil prices higher than previously projected.
However, oil is fungible and always has been. It is the world’s largest traded commodity. That is why targeted actions to punish countries by making oil unavailable have never worked as intended. Some or all of the sanctioned Russian oil will likely reach the market. It may take more devious paths than in past months because 25% of Russia’s tanker fleet has been sanctioned, and some traditional buyers will honor the sanctions. However, the black market will find buyers if the discounted oil price falls below $60 a barrel. Therefore, the only unknown is whether the sanctions substantially reduce Russian oil supplies. Only time will answer that question, and since substantial oil cargoes were contracted before the ships were sanctioned, buyers have said they will accept the oil. We will find out the reality of the “new” oil market in March.
Until the data emerges, there will be plenty of speculation about how much oil supply will be lost and how it might alter the global oil market balance. In other words, many scenarios will be highlighted that predict higher oil prices now and in the future. However, uncertainty will overhang them, raising questions about whether one should believe they will come to pass. Therefore, those with their hands on the spending levers in the global oil industry will take a wait-and-see approach to managing their companies in the face of sharply higher oil prices. Do not expect activity to change materially before mid-year.
Energy euphoria will be mainly on Wall Street and in the media. Drill, baby, drill is a metaphor for ensuring we capitalize on our natural resources and national strengths. That philosophy will govern nationally and within the petroleum industry.
