Oil to Boil, What's Next?

  • 2022-03-02 11:40:47
  • 5 min read
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The Russian war on Ukraine has dominated the news for the past week and will remain until a truce is established. However, it has reinforced already strong bullishness on energy markets and even reversed the beginning of an investor outflow from oil positions. For the past few months, prices have been on a consistent rise due to an expected imbalance between demand for crude oil and the supply of the commodity.

U.S. oil rose to its highest level, since 2013, with global benchmark Brent reaching $110 per barrel as crude's meteoric rise continues. The rise comes as OPEC and its oil-producing partners, including Russia, prepare to meet on Wednesday to talk about April's output.

Brent crude futures surged $7.00, or 7.1 %, to $104.97 per barrel, the highest closing since August 2014.

The U.S. oil benchmark, West Texas Intermediate crude futures (WTI) rose $7.69, or 8.0 %, closing at $103.41, its highest level since July 2014, and it achieved the most percentage gain in a single day since November 2020.

Members of the International Energy Agency announced plans to release 60 million barrels of oil reserves on Tuesday to slow the rise in oil prices. The U.S. will release 30 million barrels as part of this. The announcement, though, did nothing to calm the markets.    

According to Goldman Sachs: “Demand destruction, through still higher prices, is now likely the only sufficient rebalancing mechanism, with supply elasticity no longer relevant in the face of such a potentially large and immediate supply shock”.

WTI and Brent are already up more than 40% year to date, indicating that demand is picking up while supply remains tight. After executing a historic production cut of roughly 10 million barrels per day in April 2020, OPEC and its oil-producing allies have been gradually reintroducing barrels to the market increasing output by 400,000 barrels per day each month.

“Brent crude could surge to the $120 level if the oil market starts to think it is likely that sanctions will be placed on Russian energy,” said Edward Moya, senior market analyst at Oanda. He added, “Investor’s struggle to go long risk as the Russia-Ukraine crisis intensifies and as surging oil prices threaten economic growth prospects". “Stagflation risks have never been greater, and that should continue to fuel the many commodities super cycles that are running hot".

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