Brent subsequently eased to about $125, levels that are exacerbating fears of a major inflationary shock to the global economy. The Biden administration is mulling whether to prohibit Russian oil imports without the participation of allies in Europe, at least initially, according to people familiar with the matter. Diesel futures in Europe and the U.S. surged to the highest in decades, while gasoline contracts also leaped.
Secretary of State Antony Blinken told NBC over the weekend that the White House is in “very active discussions” with Europe about a ban to tighten the economic squeeze on Russian President Vladimir Putin. The U.S. has so far resisted restrictions on Russian crude imports due to concerns about the impact of rising prices, but most buyers are refusing to take it anyway, resulting in an embargo in all but name.
At one point Monday, Brent was up $21 as the market adjusted to the possibility of losing supplies from one of the world’s top three producers. JPMorgan Chase & Co. said Brent could end the year at $185 a barrel if Russian shipments continue to be disrupted, while one hedge fund said even $200 was a possibility.
The shock of surging prices of oil and other commodities is raising alarm bells everywhere. The International Monetary Fund over the weekend warned of severe consequences for the global economy. Major oil importers are starting to feel the heat, with the rupee among the biggest currency losers in Asia amid fears the Reserve Bank of India will have to raise its inflation forecast, but has little scope to tighten monetary policy.
“We have plenty of twists and turns to come,” Mike Muller, Vitol Group’s head of Asia, said Sunday on a podcast produced by Dubai-based consultant and publisher Gulf Intelligence. “While I think the world is already pricing in the fact there’ll be an inability to take in a serious amount of Russian oil in the western hemisphere, I don’t think we’ve priced in everything yet.”
Brent’s swings have eclipsed those in the global financial crisis of 2008 and the demand plunge sparked by the coronavirus pandemic. Traders, shippers, insurers and banks have been increasingly wary of taking on or funding purchases of Russian barrels as they navigate financial sanctions.
There are efforts underway to try and increase supply. Two senior U.S. officials met with members of Venezuelan President Nicolas Maduro’s government in Caracas to discuss global oil supplies and the country’s ties to Russia, according to people familiar with the matter. Iran, meanwhile, made progress toward a deal with world powers over its nuclear program, which could pave the way for sanctions on Tehran’s oil to be lifted by the third quarter.
More immediately though, supply from some of the other biggest producers continues to be a worry. OPEC producer Libya said its output fell below 1 million barrels a day because of a domestic political crisis. The Organization of Petroleum Exporting Countries and its allies last week also decided to stay the course with only gradual output increases.
The concerns over supply are showing in the oil’s market structure. Brent’s backwardation, where near-term barrels are more expensive than later-dated ones, rose to $4.92 a barrel, from $1.46 a month ago.
“With the surge in geopolitical tensions, uncertainty and anxiety, it would be quite difficult to accurately gauge the top of this rally,” said John Driscoll, founder of JTD Energy Services in Singapore. “During the 2008-2009 financial crisis, demand destruction kicked in around $150 a barrel,” but this spike is supply-driven and may send prices beyond that level, he said.