More on Oil: Just How High Can Prices Jump?

Oil prices have risen dramatically since Russia invaded Ukraine. However, analysts and traders believe that the current bounce might be only the start, as predictions of $200 (per barrel) crude oil continue to circulate in the market.

On Monday, the price of oil rose to its highest level since 2008, as Western nations considered imposing a ban on Russian crude, the world’s second-largest producer. Crude oil futures in the U.S. increased by 6% to $123 a barrel. The world’s benchmark, Brent crude, momentarily rose to $139 per barrel before sliding back to $125. Even so, that’s a jump of more than 35% in only one month.

As President Vladimir Putin’s battle in Ukraine escalates, the Biden administration has so far refrained from imposing direct sanctions on Russia’s massive energy industry. However, as bipartisan pressure increases and Ukraine calls for stiffer penalties against Russia, this might change. Over the weekend, U.S. Secretary of State Antony Blinken stated, “We are now talking to our European partners and allies to look in a coordinated way at the prospect of banning the import of Russian oil while making sure that there is still an appropriate supply of oil on world markets.”

  • What more was said, and what makes these latest statistics important?
  • How could these increasing prices at the pump impact the U.S. recovery process?

There is already a de facto prohibition on Russian oil for many in the West. Shippers, insurance firms, and banks have determined that they don’t want to risk violating sanctions or coping with the logistical challenges of picking up Russian shipments, so they’ve started seeking alternative sources of supplies. Shell recently purchased Russian oil to fulfill orders before the invasion but stated that the proceeds would be donated to “the people of Ukraine.”

However, investors are concerned because a legal ban would be more concrete. Bjrnar Tonhaugen, head of oil markets at Rystad Energy, said, “That would make it even more likely that we would lose market supply from Russia in the short term.” Russia sells around 4 million barrels of crude oil per day to the West, primarily to Europe. Some of the supplies might go to China or India, but Tonhaugen said it’s unclear how much. 

In December, Russia’s total oil exports were 7.8 million barrels per day. Removing millions of barrels of petroleum from a market already strained by a lack of supply and strong demand before Russia’s invasion of Ukraine is a recipe for more tension. Members of OPEC (Organization of Petroleum Exporting Countries), such as Saudi Arabia and the United Arab Emirates, may intervene. Still, they indicated last week that they had no plans to do so for the time being. Over the weekend, talks with Tehran on a nuclear deal that may reopen some Iranian oil exports came to a halt.

Is there a limit to how high oil may rise? Last week, JPMorgan (JPM) strategists predicted that if Russian oil supply difficulties continue “throughout the year,” prices may soar to $185 per barrel. But, according to Tonhaugen, oil prices may need to rise above $200 per barrel before demand begins to dwindle and the market rebalances. According to Bank of America, oil prices might reach $200 per barrel if “most of Russia’s oil exports are cut off.”

According to ICE Futures Europe statistics, the price of an option to purchase Brent oil at $200 a barrel more than quadrupled on Monday, showing rising concern that prices might break new territory. Brent’s all-time high was $147.50 in July of 2008.

Rapid increases in energy prices will have significant economic consequences since they will drive consumers to cut back on spending in other areas. Over the weekend, the average cost of a gallon of ordinary petrol in the U.S. topped $4, a new record since 2008. Not only has the price of oil risen, but so have the prices of other commodities such as wheat, copper, aluminum, and palladium. Last week, the Bloomberg Commodity Index rose 13%, the highest weekly rise on record.