Oil soars as more sanctions on Russia spur energy crisis fears

Worldwide oil output is already struggling to meet the rebound in consumption fueled by the reopening of economies. PHOTO: AFP

SYDNEY (BLOOMBERG, REUTERS) - Oil soared on Monday (Feb 28) as energy and commodity markets were thrown into a state of disarray after Western nations unleashed more sanctions to isolate Russia following its invasion of Ukraine.

At 0643 GMT Brent crude futures were up US$4.69, or 4.8 per cent, at US$102.62, after jumping more than 7 per cent to a high of $105.07 a barrel in early trade. Last week the benchmark hit a more than seven-year high of US$105.79 after Russia’s invasion of Ukraine began.

US West Texas Intermediate (WTI) crude futures were up US$5.34, or 5.8 per cent, at US$96.93 a barrel, after hitting a high of US$99.10 early in the day. WTI climbed to as much as US$100.54 last week.

Russia accounts for about 10 per cent of global oil supply.

“Moves by the US and Europe to remove certain Russian banks from the Swift system have raised fears of a disruption to supply of some sort in the near term,” said ANZ commodity strategist Daniel Hynes.

“The risk to supply is the greatest we’ve seen for some time and it comes in a tight market,” he said.

Oil supply was already struggling to meet the demand recovery from rebounding economies, and any disruptions to flows from the world’s No. 3 producer could sharply exacerbate the tightness. China and other buyers have paused purchases of Russia’s flagship Urals grade, while some Asian customers are frantically trying to secure more Middle Eastern crude. 

Western nations agreed over the weekend to exclude some Russian lenders from the SWIFT bank messaging system and targeted the central bank’s foreign reserves. BP also moved to dump its shares in Russian oil giant Rosneft PJSC, taking a financial hit of as much as US$25 billion (S$33.8 billion).

Russia’s invasion of Ukraine has roiled markets from energy to metals and grains, heaping more inflationary pressure on a global economy already hit with surging costs.

Against this volatile and fast-moving backdrop, Opec+ faces a trickier task than usual when it meets on Wednesday to discuss its supply policy for April. Despite the invasion, the cartel will probably stick to its plan of gradually increasing oil production, according to delegates. The group will also have to take into account the halt of some Iraqi output.

Demand destruction is the only thing that can stop oil shooting higher after additional curbs were unleashed on Russia, according to Goldman Sachs Group. The bank raised its one-month forecast for Brent to US$115 a barrel, from US$95, with significant upside risks on further escalation or longer disruption.

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Russia pumped 11.3 million barrels of oil a day in January, according to data from the International Energy Agency. The IEA pledged last week to help ensure global energy security, while India said it would support initiatives to release emergency oil reserves to help calm prices.

“The surge that we’re seeing today was guaranteed, given the considerable deterioration of the Ukraine situation over the weekend,” said Vandana Hari, founder of Vanda Insights. “Markets should brace for plenty of aftershocks.”

The surprise move by BP is the latest sign of how far the West is willing to go to punish President Vladimir Putin for the invasion. The oil major has been in Russia for three decades and was staunchly defending its presence there just weeks ago. Norway’s Equinor ASA also said it will stop new investments into its Russian business and start the process of exiting joint ventures.

Additionally, Societe Generale and Credit Suisse Group stopped financing commodities trading from Russia, according to people familiar with the matter. The two banks, key financiers to commodity trading houses, are no longer providing the money needed to move raw materials such as metals and oil from Russia.

The UK would support Group of Seven nations setting limits on the amount of Russian oil and gas its members could import “over time,” Foreign Secretary Liz Truss told Sky News on Sunday. Russia’s military “is funded by revenues from oil and gas,” so we want to cut its dependency on them, Ms Truss said.

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