OTC: US should tread carefully with Russian sanctions, says Douglas-Westwood

The US should tread carefully when it comes to oil-related sanctions against Russia given international tensions surrounding the Russia-Ukraine conflict, Douglas-Westwood said in an energy insight note released during the Offshore Technology Conference in Houston.

Some energy market observers have suggested a release from the US Strategic Petroleum Reserve (SPR) could dampen oil prices, hurting Moscow economically.

“Would the White House be cutting off its nose to spite its face?” Douglas-Westwood asked. “Unquestionably, the sector that would feel the tightening purse strings most would be the deepwater US Gulf of Mexico.”

Douglas-Westwood said, “Ultimately, the US must tread carefully in its pursuit of justice against Russia.” A release from the SPR as a measure against Russia would have consequences on world oil markets for several US allies, notably Saudi Arabia, Douglas-Westwood said.

A release from the SPR likely would trigger lower Brent crude oil prices, which could prompt the Organization of Petroleum Exporting Countries to cut oil production as a way to support of Brent prices.

Saxo Bank analyst agrees

Separately, Saxo Bank analyst Ole Hansen issued his own research note saying a release from the SPR would dampen Brent prices. But he believes such a release aimed at Russia is unlikely.

“Should the conflict in Ukraine escalate into a larger conflict, or even civil war between the pro-Russian East and the pro-European West, the international community will face a severe challenge…as it is pitting old Cold War enemies on either side of the conflict,” Hansen said.

He noted the recent series of sanctions by Western governments aimed at certain Russian businesses and individuals.

“In commodity markets, we have so far primarily seen gold, crude oil, wheat, and nickel react to the unfolding drama in Ukraine,” Hansen said. “Crude oil has reacted to the worries of supply disruptions should Russia cut off supplies to Europe in retaliation against sanctions.”

Oil prices might spike, at least initially, if Russia were to cut off supplies to Europe, Hansen said.

“Such a move, however, would be very surprising and incredibly counterproductive for Russia as it receives a huge bulk of its oil revenues from Europe,” Hansen said. “The dependency between Russia and the former Soviet Union and Europe has continued to grow over the years, especially when it comes to crude and gas. It is worth remembering that even during the height of the Cold War, oil was never used as a weapon between the two sides, and the risk of that happening remains relative low.”

Contact Paula Dittrick at paulad@ogjonline.com.

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