Oil prices soar on supply concerns after Russian invasion

Global oil prices surged again Mar. 1 as supply concerns emanating from the war in Ukraine gather pace.

Brent futures for May delivery rose 8% to $105/bbl. US West Texas Intermediate (WTI) crude for April rose 8.6% to $103.99/bbl.

Some buyers shunned Russian barrels following the sanctions on Moscow. Prices are soaring as global supply tightened and demand recovered. Russia is one of the world's largest oil producers, exporting around 4-5 million b/d of crude.

“Russia’s flagship Urals blend was one of the first to break through the $100/bbl mark this year, but the country’s incursion into Ukraine has now made it one of the most toxic barrels on the market. The medium sour blend, which hit multi-year premiums versus Brent earlier this year, is now trading at more than a $10/bbl discount to the North Sea benchmark,” said Louise Dickson, a senior oil market analyst at Rystad Energy.

“Proposed sanctions that would either blacklist Russian oil supplies or blacklist the financial tools to purchase Russian crude is already hitting Urals crude pricing formation as European refineries attempt to reshuffle Urals purchases for other comparable medium sour grades, especially those hailing from the Middle East and OPEC core members Saudi Arabia and Iraq.”

But, as Dickson noted, if Europe rejects the discounted Urals, there will be refineries that will pick up the barrels. In particular, Asian refiners will have the opportunity to snap up barrels and capitalize on the strong discount.

The flagship Urals blend is primarily loaded and shipped out of the Novorossiysk and Primorsk ports on the Black Sea and the Baltic ports of Ust-Luga and Primorsk and primarily is unloaded in European countries.

The severe discount on the medium sour grade could influence OPEC+’s decision at tomorrow’s meeting to bring more analogous barrels, such as Arab Light, Arab Heavy and Basrah Light, to the market, said Dickson.

“As Omicron recovery extends, refineries capitalizing on high middle distillate cracks see increased competition for medium sour grades. Of the total 22 million global medium sour barrels in production globally, Saudi Arabia accounts for 8.6 million b/d, Iraq 3 million b/d, Russia 2.7 million b/d, Kuwait 2.1 million b/d, Iran 1.7 million b/d, and the UAE about 800,000 b/d, as well as 1.2 million b/d from the US, predominantly from the deepwater US Gulf of Mexico fields.”

On Mar. 1, members of the International Energy Agency (IEA) discussed releasing 60 million bbl of oil from their Strategic Petroleum Reserve (SPR) to lower prices.

“The proposed maneuver by the US and allies to release SPR are reported to include sweet grades, which would likely have a more direct impact on gasoline prices in North America than the last release, which was primarily nominated in sour crude volumes from the US side,” said Dickson.

OPEC+ will meet Mar. 2 to increase its quota ceiling by 400,000 b/d for April 2022. OPEC+ countries produced about 800,000 b/d below stated target levels, adding to the shortness in supply and further contributing to the bullish price environment.