NEW YORK (BLOOMBERG) - Oil surged above US$100 a barrel for the first time since 2014 as Russia invaded Ukraine, triggering fears of a disruption to energy exports at a time of already tight supplies.
Global oil benchmark Brent jumped 8 per cent to more than US$105 a barrel after Russian President Vladimir Putin ordered Russian troops to strike military facilities across Ukraine.
The price of Brent crude, the global benchmark, shot up more than 8 per cent to US$105.32 a barrel. US oil, West Texas Intermediate crude, also jumped 8 per cent, moving above US$100 a barrel for the first time in more than seven years.
Natural gas in Europe rose as much as 40 per cent, while metals including gold, aluminum, copper and nickel also spiked. Russia is a key seller of commodities to global customers, with Europe relying on the nation for about a quarter of its oil and a third of its gas.
The escalation has spooked a market that was already under stress, as oil supplies around the world fail to keep pace with a vigorous recovery in demand as the Coronavirus pandemic recedes. The Opec+ coalition, led by Russia and Saudi Arabia, is struggling to restore production quickly enough, prompting some of the biggest market players to warn of higher prices.
Opec+ meets on March 2 to decide on output for April. As of Wednesday, delegates from some of the biggest members were saying that triple-digit oil wouldn't cause them to pump faster.
It is possible that the Organisation of Petroleum Exporting Countries will increase production if there is further escalation, according to Dr Carole Nakhle, founder of consultancy Crystol Energy.
"The oil market will now wait to see how Western nations respond to Russia's latest actions," said Mr Warren Patterson, head of commodities strategy at ING Groep. "We will likely see even further volatility in the market, as well as the need to price in a larger risk premium."
The US and Europe will almost certainly respond in the coming hours and days with a far-reaching package of sanctions, Eurasia Group said. While Western governments will likely exempt energy transactions from sanctions, the blizzard of new restrictions will force many traders to be exceedingly cautious in handling Russian barrels, they said.
US emergency reserves
Japan and Australia said yesterday they were prepared to tap their oil reserves, together with other member nations of the International Energy Agency (IEA), if global supplies were hit by hostilities in Ukraine.
The Biden administration is considering tapping its emergency reserves of oil again in coordination with allies to counter the surge in prices, Bloomberg reported on Wednesday.
Crude’s return to triple digits completes a prodigious recovery - barely imaginable a year ago - from the pandemic as the market flips from surplus to scarcity. It reflects a global economy rushing back to normality from Covid-19 and disruptions in the exports of raw materials of all kinds.
In addition to oil and gas, Russia is a major producer of aluminium and wheat, which Ukraine also grows. The increase in the price of multiple commodities is contributing to a surge in inflation to the highest level in decades, threatening a cost-of-living crisis for millions and forcing central banks to contemplate a phase of monetary tightening that might choke off the rebound.
Supply constraints extend beyond oil, across the full spectrum of energy derivatives and commodities markets. More raw materials are commanding a higher premium for prompt deliveries than at any point in the past two decades, according to Bloomberg calculations.
“We’re out of everything - I don’t care if it’s oil, gas, coal, copper, aluminum, you name it, we’re out of it,” Dr Jeff Currie, head of commodities research at Goldman Sachs, said in a recent Bloomberg TV interview. “I’ve been doing this 30 years and I’ve never seen markets like this.”
This creates a profound dilemma for Western powers. Imposing a financial cost on Russia for its actions in Ukraine, for example by putting sanctions on oil and gas exports, could cause just as much pain for their own economies.