On Tuesday, the United States imposed a ban on Russian oil exports in its latest effort to intensify sanctions on Russia. In a bid to counter Russia’s invasion of Ukraine, Western nations have pursued a strategy of sanctions to isolate Moscow.
Rystad Energy’s Head of Oil Markets Bjørnar Tonhaugen said that prices will skyrocket if Western countries continue to pursue energy sanctions.
Commenting on the market volatility, Tonhaugen stated: “Oil prices could hit $240 per barrel this summer in a worst-case scenario if Western countries roll out sanctions on Russia’s oil exports en masse. As a result, market volatility is at an all-time high, with prices surging on the expectation that supply will further tighten due to restrictive sanctions on Russian energy from the West.”
Meanwhile, Britain has said that it will phase out imports of Russia’s energy exports by the end of this year, with Prime Minister Boris Johnson stating that the country would set out a new energy strategy. In addition, the EU said that it plans to cut its dependency on Russia’s gas by two-thirds by the end of 2022, and on fuel supplies before 2030.
“This is the largest energy crisis in decades, and the impact on the world’s most important commodity is going to be unprecedented. If more Western countries join the US and impose oil embargoes on Russia, it would create a 4.3 million BPD hole in the market that simply cannot be quickly replaced by other sources of supply,” Tonhaugen added.
He said that due to this gap in the market, oil prices will have to rise to destroy demand and incentivise a supply response through higher activity. Both of these will happen with a time lag of several months to rebalance the market at a higher supply/demand/price intersection.
In response to statements that sanctions would be imposed on the nation, Russia’s Deputy Prime Minister Alexander Novak said that if EU nations are ready to reject Russia’s energy supplies, it will lead to catastrophic consequences for the global market.
Russia provides 40 percent of Europe’s gas, while the US imported 473,000 BPD of Russia’s refined products and 199,000 BPD of Russian crude in 2021, according to the Energy Information Administration, S&P Global Platts reported.
Elaborating on how market volatility could compound in the next few months, Tonhaugen noted that oil prices would continue to rise until they reach an unsustainable level that curtails demand and closely resemble the path of natural gas markets from last year.
“That threshold could potentially be as much as $240 per barrel, which would curb international market demand sufficiently over the coming six months through both, a direct price impact and an indirect GDP impact. Moreover, the higher prices go, the larger the chances of the global economy entering a recession already in the fourth quarter of 2022.”
He reiterated that oil at $240 a barrel would trigger a global recession, and self-destruct the price-level within a few months, after which it would fall sharply.
Currently, West Texas Intermediate – the benchmark for US oil – is trading at $120.22 a barrel, while the global benchmark – Brent crude- is trading at $124.70 a barrel.
“If 4.3 million BPD of Russian oil exports to the “West” are halted by April 2022, and where China and India only keep current import levels intact, Brent would need to spike to $240 per barrel by the summer of 2022 to destroy demand,” concluded Tonhaugen, adding that this collapse would be the largest potential oil supply shortage since the 1990 Gulf War, when oil prices doubled.
