Oil pushes higher on nervousness over threat to Russian flows

Russia's invasion of Ukraine has spooked a global oil market that was already perilously tight. PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - Oil rose in Asian trading on Friday (Feb 25) on concern that financial sanctions on Russia may impede global fuel supply chains, following a wild session in which prices spiked more than 9 per cent before giving up gains. 

Brent crude climbed around 3 per cent after surging above US$105 a barrel at one point in Thursday’s dramatic trading.

Futures had earlier pared most of Thursday's advance as US President Joe Biden made it clear that Western powers were not willing to sacrifice their own economies to penalise Moscow for its invasion of Ukraine.

While the US imposed its toughest-ever sanctions on Russia as its tanks and troops moved closer to the Ukrainian capital, it said restrictions on currency clearing would include carve-outs for energy payments, a crucial source of revenue for Moscow.

Mr Biden also said Russia will not be barred from the Swift international banking network because Europe opposed that action, but some European lenders are nevertheless scaling back exposure to Ukraine and Russia in a threat to the credit lines essential to trade. 

“The initial concerns that oil would be caught up in any sanctions on Russia has eased, resulting in prices pulling back from yesterday’s rally,” said Daniel Hynes, a senior commodity strategist at Australia & New Zealand Banking Group. “However, steep discounts being offered for Russian crude are still not receiving bids. This suggests there may still be some supply issues if banks can’t facilitate trade in the short term.”

Russia’s invasion of Ukraine has spooked a global oil market that was already perilously tight due to the inability of supply to keep up with the demand recovery from the pandemic. Mr Biden said the US is working with other major consuming nations on a coordinated reserves release. Any such sales would need to be very large to have a major impact on prices, however.

Japan and Australia have indicated they may be part of an international reserves release, but China said it had no immediate plans to intervene in oil markets. A spokesman for Beijing said it would only consider such a move when the geopolitical situation had stabilized.

Oil stockpiles at Cushing, Oklahoma, continued to slide, falling to the lowest since September 2018, data released Thursday showed. Inventories at the hub are fast approaching critical levels and could set the stage for a further run-up in futures, since it is the delivery point for the benchmark US contract.

There is a risk oil will rise to US$125 a barrel should demand destruction be required to balance the market, Goldman Sachs said in a research note. The recent rally threatens the prospects of a nuclear agreement with Iran that would add to global supply, as the producer can access higher cash flows from record-high sales to China, analysts including Jeffrey Currie said.

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