Oil charges towards US$120 as sanctions target Russian refiners

The gains in oil prices followed the latest round of US sanctions on Russia’s oil refining sector. PHOTO: BLOOMBERG

SINGAPORE (REUTERS, BLOOMBERG) - US sanctions targeting Russian refineries, disruptions to shipping and a fall in US crude stocks to multi-year lows kept oil prices racing on Thursday (March 3) as Brent charged towards US$120 a barrel, its highest in almost a decade.

Brent crude futures rose as high as US$119.84 a barrel, the highest since May 2012. The contract was at US$119.78 a barrel, up US$6.85, or 6.1 per cent, by 0752 GMT.

US West Texas Intermediate crude hit a high of US$116.57, the loftiest since September 2008, and was at US$116.41 a barrel, up US$5.81, or 5.3 per cent.

The gains followed the latest round of US sanctions on Russia’s oil refining sector that raised concerns that Russian oil and gas exports could be targeted next.

While wielding economic sanctions to try to make Russia call off its invasion of Ukraine, Washington has stopped short of targeting Russia’s oil and gas exports as the Biden administration weighs the impact on global oil markets and US energy prices.

“They may be saying that, but global financial institutions are doing the heavy lifting and blanket banning anything with Russia written on the documentation,” Oanda analyst Jeffrey Halley said.

“I think as long as the West holds its nerve, oil will still go higher.”

Australia’s ANZ raised its short-term target for oil to US$125 a barrel, adding that supply shortages could see further upside.

Russia is the world’s third biggest oil producer and the largest exporter of oil to global markets, according to the International Energy Agency. Russian crude and oil product exports reached 7.8 million barrels per day in December, the agency said.

But the invasion of Ukraine has rapidly made Russia a commercial outcast, resulting in most buyers and shippers avoiding cargoes of its crude, diesel, heavy naphtha and vacuum gasoil. That is causing abrupt changes in market structures, price dislocations and violent swings in freight rates.

The result is a physical market for crude too chaotic even for veteran oil traders who have spent years deftly handling everything from political sanctions to trade wars to attacks on key infrastructure. In the current climate, traders say, even an action as simple as a seller knowing what price to offer their crude at has become confusing.

Oil trading giant Trafigura Group tried to sell a cargo of Russia’s flagship Urals grade this week at a record discount to benchmark prices for north-west Europe but found no bidders, highlighting how toxic trade with the country has become.

Asian refiners instead are trying to snap up more Middle Eastern oil, although incremental supplies from the region are very limited, the traders said. More US cargoes are also in their sights, but backwardation, surging transport costs and wild divergences in global benchmarks are making that challenging. Their European counterparts are looking to buy more North Sea crude, which may price Chinese and South Korean refiners out of that market, the traders said.

Meanwhile, the Organisation of the Petroleum Exporting Countries and their allies including Russia, known as Opec+, decided to maintain an increase in output by 400,000 barrels per day in March despite the price surge, snubbing calls from consumers for more crude.

“Opec+ essentially punted on sending any production signals to calm the runaway oil market, rolling over the 400k b/d production increase in record time,” RBC Capital analyst Helima Croft said in a note.

Remote video URL

“While some remain transfixed with the idea that an Iran agreement will provide much needed relief, we again caution that the deal is still not done and the sums entailed would simply be too small to backfill a major Russian disruption.”

The head of the International Atomic Energy Agency will visit Teheran on Saturday, Iranian news agency Nournews reported, suggesting this could help pave the way to a revival of Iran’s 2015 nuclear agreement with major powers.

Meanwhile, US oil inventories continued to decline. Tanks at the key Cushing, Oklahoma crude hub were at their lowest since 2018, while US strategic reserves dropped to a near 20-year low - and that was before another release announced by the White House on Tuesday in tandem with other industrialised nations.

Follow The Straits Times' live coverage on the Ukraine crisis here.

Join ST's Telegram channel and get the latest breaking news delivered to you.