Oil Contracts Navigate Sanctions, Limit Price Spike

Oil prices were off their highs on Monday but fears continued that financial sanctions against Russia could hamper the country’s oil exports and further tighten a global market that was already fighting to meet demand.

After reaching a high of $105.07 per barrel for a gain of nearly $8, Brent contracts on ICE Futures deflated on Monday, with the expiring April contract ending up $3.06 at $100.99/bbl, while the new front-month May contract added $3.85 to settle at $97.97/bbl.

In New York, April Nymex West Texas Intermediate (WTI) gained $4.13 to close at $95.72/bbl.

Traders and bankers were cautiously finding ways to pay for Russian oil and products after the US and other Western countries sanctioned five key banks, including Sberbank and VTB, while Asian and European traders kept Russian cargoes mostly at arm’s length.

New sanctions punishing Russia for the invasion of Ukraine include expelling some banks from the Swift capital transfer system, making it harder to pay for Russian oil.

If Russian exports are interrupted, oil prices could shoot higher, as the nation exports some 5 million barrels per day of crude oil and 2.5 million b/d of refined products — and most of that to Europe, which would probably not be able to replace all of the Russian oil.

The price jump was tempered by the prospects that the US might lead another release from strategic petroleum reserves of at least 60 million barrels and that Iran could resume exporting crude after reaching a new nuclear deal.

Liquidation

On the oil exchanges, traders feared that positions backed by Russian accounts might have to be liquidated if alternative funds from non-sanctioned banks are not available for basic transactions like meeting margin calls.

Larger traders typically hold accounts with more than one bank, so swapping out one account for another should be not more than an administrative headache. But it also might not be that easy and could hurt liquidity.

“This can be a huge cascading event,” one trader noted, adding that when smaller players can’t get the financial liquidity they need, “things slow down pretty fast.”

More complicated are the financial constructs that cover hedges where there is a bank, a hedging party and a broker. Sanctions could lead to such an agreement being dissolved and the positions being liquidated.

On Monday morning, no reports of such liquidations had reached the market.

Traders said the oil market in London would be more affected than New York, since London is “the transfer point for commodity currencies and letters of credit.”

Western countries are trying to target Russia’s economy while minimizing the damage from rising oil and gas prices, which are already a key catalyst for inflation around the world. Further oil and gas price increases could slow down the global economy, which is still recovering from the Covid-19 pandemic.