Russia Invasion, Biden Rhetoric Buffet Crude Prices

Oil futures jumped by almost $9 in early trading on Thursday after Russia launched its invasion of Ukraine, but lost much of that ground later in the session.

Russia launched airstrikes, crossed the border, took over airports and even occupied the wreck of the Chernobyl nuclear plant on Thursday. In response, the US and its allies imposed more sanctions on Russia and the US announced it would send more troops to Europe.

US President Joe Biden in a public address stressed that the US would not go to war with Russia, although he added the country would defend its Nato allies under Article 5 of the treaty organization’s charter.

In addition, Biden said the US would release crude from its Strategic Petroleum Reserve (SPR) “as warranted.”

Crude backed away from intra-session highs as the day wore on and especially just before the end of official hours, coinciding with Biden's statements.

Global benchmark Brent crude for April delivery breached the $100 mark for the first time since 2014 early in the session, but the contract ultimately settled $2.24 higher at $99.08 per barrel after trading as high as $105.79 per barrel.

In New York, April West Texas Intermediate (WTI) on Nymex ended the session up 80¢ at $92.81/bbl, well shy of its session high of $100.54/bbl, and then lost more ground in after-settlement trading.

Sanctions from the US and its allies have yet to target oil directly. Nonetheless, “buyers are shying away from purchasing Russian crude oil. They are concerned that either the oil or the tanker that the oil is loaded on might end up entangled in financial sanctions.”  

As a result, the perceived availability of crude has diminished, bumping up prices.

“Fears over supply disruptions have sent crude oil prices surging further higher,” said Fawad Razaqzada of ThinkMarkets.  

Prices could continue to climb higher in the coming days and weeks depending on how the situation in Ukraine develops, traders and analysts said.

“Should Russia cut off supplies to Europe, I expect oil prices would rise to $110/bbl until resupply and/or demand destruction gets the world back in balance,” Lipow said.  

On the other hand, a resolution or at least a halt to the fighting would help unwind the geopolitical risk premium baked into oil prices.

Physical crude markets continue to point the way higher, with dated Brent trading off its session highs but still hovering above $100/bbl. In addition, crude’s forward curve is signaling extreme tightness at the front. April settled a whopping $3.66 above the May contract, and month-to-month backwardation of $1 or higher persists through August.

Russia's invasion of Ukraine comes against the backdrop of a tight market, with fundamentals already skewing prices to the upside.

“Setting aside the Ukrainian crisis, the medium-term outlook remains bullish on its own right,” noted Tamas Varga of oil brokerage PVM. “The global economy is growing and oil consumption has reached or is about to match pre-pandemic levels. Supply has not been able to keep up with the growth in oil demand.”

However, market watchers said oil prices might be overbought and that some degree of price relief could be looming.

“There is a risk of a pullback in the not-too-distant future. One source of support could come in from expectations of higher Iranian exports” as a new nuclear deal seems to be close to fruition, Razaqzada said.