Breaking News
Investing Pro 0
New Year’s SALE: Up to 40% OFF InvestingPro+ CLAIM OFFER

How Oil Could Hit $200 And Beyond

By Ross HendricksCommoditiesMar 15, 2022 08:42AM ET
www.investing.com/analysis/how-oil-could-hit-200-and-beyond-200619833
How Oil Could Hit $200 And Beyond
By Ross Hendricks   |  Mar 15, 2022 08:42AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
RDSa
-0.11%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
LCO
-1.28%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
CL
-1.33%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
USO
-1.04%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

Vladimir Putin's invasion of Ukraine threw a spark into the powder keg of the global oil market. The incursion sent oil prices barreling towards new record highs. And without a relatively quick resolution, we could see even more explosive gains ahead:

Oil Monthly, 2004-2022+
Oil Monthly, 2004-2022+

While the geopolitical situation is complex, and prices for now have retreated somewhat, the impact of war and other global disruptions on oil markets impact distills down to basic supply and demand. Even before the Ukraine conflict, the world was running short of oil, signaled by prices rallying above $90 per barrel at the start of 2022.

Now, the market risks losing millions of barrels of supply at the worst possible time.

Below, I’ll explain why a prolonged disruption of Russian exports could make today’s prices for both WTI and Brent—which continue to hover around the $100 level—seem cheap. Absent a quick resolution, we could face the prospect of $200 per barrel, or even higher.

Unprecedented Supply Disruption

Russia is the world’s third largest oil producer, with output of 11.3 million barrels per day (bbl/d). The country consumes about 3.5 million of those barrels domestically, while exporting more than 7 million bbl/d of crude oil and refined products daily (the term “oil” will refer to both crude and refined products in this article). That makes Russia the world’s single largest oil exporter.

Before the Russian invasion of Ukraine, 4.8 million bbl/d of Russian oil exports went to countries that are now backing sanctions against Russia. This primarily includes western European countries that are part of the EU, plus the U.S. and a few others. Meanwhile, another 2.3 million bbl/d goes to countries not backing sanctions—primarily China, along with several eastern European countries (here's who buys Russian oil exports).

While we can likely count on China and Eastern Europe to continue buying Russian oil, that still leaves a massive 4.8 million bbl/d of exports at risk from the escalating tensions between Russia and the West.

Outside of coordinated OPEC actions—which typically occur in bear markets—the world has never before suffered a supply disruption of this magnitude. Of course, Western leaders appreciated the critical nature of Russian exports in balancing the global oil market. That’s why the politicians initially avoided direct sanctions on Russian energy in the wake of the invasion.

However, the scope of the financial sanctions leveled against Russia were the most sweeping of any kind ever implemented. So despite these intentions, the Russian oil trade got caught in the crossfire as collateral damage.

Caught in the Sanctions Crossfire

Physical oil trading is a complex business that involves multiple layers of transactions and counterparties. So even where Russian crude is still technically legal to trade, the sanctions package in many cases has gummed up the inner-workings of the trade to the point of killing the market.

One example: physical oil traders often use letters of bank credit to finance the purchase of crude oil cargoes. But as the Wall Street Journal reports:

“[The] banks that grease the wheels of international commerce are refusing to finance Russian commodity deals.”

Without this critical source of financing, traders can’t buy Russian crude and deliver it into the global market. Meanwhile, we’re hearing similar reports of refiners, insurance providers and other key cogs in the physical market stepping away from dealing in Russian oil. Even if the transactions aren’t technically illegal, these players simply don’t want the risk or headache involved.

As one trader at a major commodities broker simply explained: “the market is starting to fail.”

Meanwhile, even if Western companies are willing to take the legal/financial risk of buying Russian crude, they now face huge reputational risk. Case in point, oil supermajor Shell (NYSE:SHEL) purchased 100,000 barrels of Russian crude at a record discount a week ago Friday. The backlash was enough to spark a public apology from Shell last Tuesday, along with a commitment to “stop all spot purchases of Russian crude oil.”

The situation escalated further last week, when the Biden administration took direct aim at Russian energy by announcing a ban on Russian oil imports into the U.S. The U.K. followed up with a similar ban on imports of Russian crude.

Russia quickly responded with the prospect of banning Russian commodity exports in response to Western sanctions.

So already, a substantial portion of the 4.8 million bbl/d of Russian oil exports to Western economies is disrupted by the indirect impact of sanctions and popular pressure. Now, escalating tensions threaten to directly impair the entire 4.8 million bbl/d of export volumes.

This would be a massive disruption during normal times. It’s an even bigger problem for today’s oil market, which was already facing a major supply deficit even before the threat of losing millions of Russian barrels.

Global Oil Inventories Running on Fumes

During the initial COVID-19 outbreak, economic shutdowns around the globe briefly took up to 20 million bbl/d of demand offline. This created a historic build in crude inventories. However, the market quickly flipped from surplus to deficit as supply came offline and demand rebounded. By Q3 2020, the market entered into a structural deficit, with global crude inventories drawing down by an average of 1.8 million barrels per day (bbl/d) through Q4 2021:

Global Crude Inventories
Global Crude Inventories

On the surface, a 1.8 million bbl/d deficit might seem modest in the context of a 90–100 million bbl/d global market. But this shows why the price of oil (and all other commodities) is set by the marginal barrel. It only took a roughly 2% daily supply deficit, compounded over 18 months, to erase a record oil surplus in record time.

So, you can imagine the catastrophic impact of a 5% supply deficit from the disruption in Russian oil exports. Especially given the current backdrop of oil inventories approaching the low end of their historical range.

On that note, today’s inventory situation could be even worse than pictured above. Let me explain…

You see, the big public forecasting agencies that report on global oil stockpiles aren’t measuring tank levels. Instead, they estimate supply and demand, and take the net result as an implied inventory change. That means a faulty read on either supply or demand could produce a faulty inventory estimate. And it turns out, that’s exactly what’s happened in recent years.

200 Million Missing Oil Barrels

The International Energy Agency (IEA) is a key source for information on global oil supply and demand. So it raised more than a few alarm bells when the IEA recently admitted to massively underestimating global oil demand in recent years. After revising up their demand figures, the agency reported that global oil stockpiles are about 200 million barrels lighter than previously expected.

That means today’s global oil market could actually be much tighter than the numbers reported by agencies like the IEA.

For a more accurate measure of inventories, we can look at the weekly storage levels in Cushing, Oklahoma—the key hub that sets the WTI oil price. Unlike the global inventory data that comes from supply/demand guesses, the storage tanks at Cushing are directly measured each week.

The latest data shows that Cushing stocks have fallen to just 22.2 million barrels. That’s only about 10% above the operational minimum level of ~20 million barrels, and moving lower with each passing week:

US Oil Inventories, Cushing Data
US Oil Inventories, Cushing Data

The bottom line: today’s oil market has very little margin of error.

On Wednesday, I'll analyze the supply and demand trends that got us here, which will then provide a roadmap for what we might expect from oil markets going forward. Read part 2 here.

Editor's Note: this content was originally posted at the Ross Report.

How Oil Could Hit $200 And Beyond
 

Related Articles

How Oil Could Hit $200 And Beyond

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (10)
Rajinder Choudhuri
Rajinder Choudhuri Mar 28, 2022 1:11PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Now, Rose will say oil week be USD 200 by end of 2026
Rajinder Choudhuri
Rajinder Choudhuri Mar 28, 2022 1:10PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
No mention of demand destruction on account of higher cost of oil
patricio Silva
patricio Silva Mar 15, 2022 2:35PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
oil gonna reach 1 thsd my man 1 thsd my man
filipe moreira
filipe moreira Mar 15, 2022 12:52PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
now write us an article of how one can die by crossing an everyday corner... you will find out there are more reasons to this last one.
John Berry
John Berry Mar 15, 2022 12:50PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Bingo. Ross is right on the money. About time someone had a brain on here.
Gel Gat
Gel Gat Mar 15, 2022 12:19PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Too optimistic..expect the unexpected
Sidney Glover
Sidney Glover Mar 15, 2022 9:16AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
numbers can be made to say anything. Ross' article has circular logic to make his point but he forgets simple laws of supply and demand. people are not going to afford to drive at $10 per gallon of gasoline. demand drops. at some point the price manipulation stops and laws take effect. it already is taking effect. prices are below $100 a barrel. the effective stop was $120 where trading stopped until price cane down. Ross are you paid by the greedy or the Russians to sow panic? are you a trader?
Tunde Ikudaisi
Tunde Ikudaisi Mar 15, 2022 9:16AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Ross analysis is as real as it gets. Definitely oil prices will still go up, to 200$ maybe. What you are seeing now is just a correction in price movement. Expect oil prices to surge higher for sure
Marcus Berntsson
Marcus Berntsson Mar 15, 2022 9:16AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
It could go to 200, but you would see demand destruction and a recession after passing 150usd.
Don Getty
Don Getty Mar 15, 2022 9:16AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Marcus Berntsson  people stock piled cash during covid, i know my personal net worth double in the last 2 years - interest rates for Morts are locked in at mostly all time lows for extended periods - the world is not crashing to a stop if oil goes up - all the russian construction commodities are going to be a bigger factor - take several years to bring more production online in those areas
Ross Hendricks
Ross Hendricks Mar 15, 2022 9:16AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Sidney, funny you say that. I wrote a Twitter thread making the exact same point - that if this scenario unfolds, it will be a destructive rally that won't be good for anyone. Of course, that doesn't mean it can't happen, or that investors should ignore the risks.
Anthony Banks
Anthony Banks Mar 15, 2022 9:05AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Anything is possible.
Anthony Banks
Anthony Banks Mar 15, 2022 9:04AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Anything is possible in these heavily manipulated markets.
Alex Growth
Alex Growth Mar 15, 2022 8:49AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
very optimistic...
Edward Chong
Edward Chong Mar 15, 2022 8:49AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
to be rude. its rubbish
Alex Growth
Alex Growth Mar 15, 2022 8:49AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Edward Chong  hehe... take it easy
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email