By Barani Krishnan
Investing.com -- Oil markets settled at 7-1/2 year highs on Tuesday after ceasefire negotiations between Russian and Ukraine forces failed, and traders worried that international sanctions against Moscow would lead to an implosion of exports from a country that is at the heart of global energy supply.
The most-actively traded contract in global crude benchmark Brent settled up $3.98, or 4%, at $104.97 a barrel for its highest closing since August 2014. It spiked to as high as $107.97 during the session, also marking a 7-½ year peak.
U.S. crude’s West Texas Intermediate, or WTI benchmark, settled up $7.69, or 8%, at $103.41 a barrel on its front month. WTI hit an intraday $106.75 during the session, also its highest since 2014.
Tuesday’s run-up in oil prices came despite the Paris-based International Energy Agency announcing the coordinated release of 60 million barrels from the emergency reserves of consuming countries to provide some relief to the 31 nations on its membership.
The EIA said it intended “to send a unified and strong message to global oil markets that there will be no shortfall in supplies as a result of Russia’s invasion of Ukraine”.
But analysts said the loss in Russian energy supplies to the market may be too much to ignore.
Some 10% of the world’s crude and 40% of Europe’s gas needs are provided by Russia.
“The oil rally has seriously accelerated today, breezing past $100 and gathering momentum along the way … despite the U.S. once again leading discussions around a coordinated release of oil reserves … which is clearly doing little to calm the nerves,” said Craig Erlam, analyst at online trading platform OANDA. “We saw an underwhelmed reaction when this (coordinate release) happened in November as well … before Russia invaded Ukraine.”
As energy giants such as Shell (LON:RDSa) and BP (NYSE:BP) abandon projects in Russia, the world is beginning to “see what impact these sanctions could have on Russian oil exports and the challenges they pose and that's driving the price higher”, added Erlam.
On Tuesday, the U.K. government added to the world’s move to isolate Russia by launching an urgent review of Britain’s exposure to Russian gas and energy groups, the Financial Times reported.
Britain’s BP had earlier said on Sunday that it was withdrawing its $14 billion stake in Russian oil giant Rosneft.
Anglo-Dutch owned Shell has said it will exit all its Russian operations, including a major liquefied natural gas plant.
Russian gas exports appeared poised to take a hit as well over the coming months, with IEA saying it will release on Thursday a 10-Point plan on how European countries could reduce their dependence on Russian gas supplies by next winter .
The move comes on the heels of Tuesday’s meeting among ministers of energy consuming countries that discussed “looking to other suppliers, including via LNG (liquefied natural gas), and to continue to pursue a well-managed acceleration of clean energy transitions”, the Paris-based IEA said.
Roughly a third of the gas burned in Europe are from Russia's Nord Stream 1 and Yamal gas pipelines. Speculation is rife that higher exports of US LNG will be needed to compensate for any drop in Russian gas flows to Europe.
The front-month in US natural gas futures settled up 3.5% at $4.57 per thermal unit on Tuesday.
The West had taken pains initially not to target Moscow’s energy exports with sanctions due to its own reliance on Russian oil and gas.
But that mindset changed over the weekend, with the United States, Britain, Europe and Canada blocking the access of various Russian banks to the SWIFT global interbank payment system — squeezing the billions of dollars that Russia trades a day in oil and other commodities.
EU officials affirmed on Monday their plan to wean the bloc from its dependence on Russian energy, while being prepared to suffer spiraling oil and gas costs in the short-term. Crude prices have risen more than 35% since the year began, while US natural gas has gained about 23%.
The latest rally in energy prices came ahead of Wednesday’s meeting of global oil producer alliance OPEC+, which is expected to stay with its gradual output increase strategy, ignoring calls from consuming nations under the IEA.