Righteous indignations aside, the Russia-Ukraine crisis has been credited by most market watchers as the reason oil prices are “high.” We could not disagree more. Yes, we did see a very brief price jump in the immediate aftermath of this past Thursday’s invasion.
The knee-jerk reaction reflected concerns about Russia’s oil and/or natural gas exports being sanctioned/embargoed because of its invasion. As we noted to our clients in various reports (and in our last column in the Arab News), such sanctions have a near-zero probability given Russia’s supplies are irreplaceable in the global energy balance.
As oil market reactions go, it is understandable that high uncertainty levels trigger an “accumulation response” — we all saw it with bathroom supplies during the pandemic. In the case of oil, though, assertions about Russia-Ukraine steer the conversation away from the material tightening of the global oil balance. When we say, “material tightening,” we are referring to the near 700 million barrel inventory draw that occurred since July 2020, a drawdown that stands unmatched in oil market history.
We suppose the inordinate amount of blame attributed to Russia-Ukraine for oil prices comes from those who “knew” the oil market would see an oversupply develop last year: That US production would surge (which did not happen — actually output shrank year-over-year) and that the Organization of the Petroleum Exporting Countries would not be able to exercise sufficient output control (which, in fact, they did — much to the credit of Saudi leadership). We also note that based on inventory levels, crude prices ended last week about 8 percent below the current ”fair value.”
That noted and almost on cue, last week’s invasion of Ukraine prompted a few large oil-consuming countries to call for a release of emergency oil stocks. Because of the near-zero odds for Russia’s oil exports to be embargoed or sanctioned, though, the probability for any meaningful releases are low given an actual supply hiccup is not likely — a jump in oil prices, which was temporary, does not classify as a bona fide emergency. We also note that history has shown that releasing emergency oil stockpiles for non-emergencies tends to see oil prices rally through the release.
OPEC raising its output in reaction to market angst about the invasion is not a high probability event either. The plan in place to keep unwinding quotas will be discussed at this week’s meeting, but we sense the group will not allow itself to be goaded into dumping supply, particularly given the chatter about a possible new “nuke deal” with Iran. The OPEC+ remains highly focused on keeping oil inventories from swelling (and oil prices from being pressured lower).
The last item we will make note of centers on a question about whether oil prices are at levels that can cripple global economic activity. The short answer is “no.” An analysis we have published examines expenditures on petroleum and crude prices do not become problematic until we are well over the $130 per barrel level.
• Michael Rothman is the president & founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986. He is also the author of “Cornerstones of Life” which is available on Amazon.
