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Wednesday, March 2, 2022

WTI Hits $111 a Barrel. When Does it Stop?

Oil's price ascent is showing no signs of slowing down ahead of one of the most important OPEC+ meetings since the beginning of the pandemic. WTI crude futures (CL1:COM) climbed another 6.6% overnight to top $110 per barrel, and that was despite the U.S. and other members of the IEA agreeing to release 60M barrels from the Strategic Petroleum Reserve and other emergency stocks. The coordinated drawdown would be only the fourth in the agency's history, sending a "unified and strong message to global oil markets that there will be no shortfall in supplies as a result of Russia's invasion of Ukraine."

Analyst commentary: "Although the sanctions are still being crafted to avoid energy price shocks, we believe this aggressive-but-not-maximalist stance may not be sustainable, with disruptions to oil and gas shipments looking increasingly inevitable," Evercore ISI wrote in a note to clients. "Russia is casting a long, dark, unpredictable, and very complicated shadow." Part of the issue is that many Western banks, shipowners and refiners are hesitant to do business with Moscow, fearing legal/reputational risk, or an eventual sanctioning of Russia's energy sector.

Meanwhile, the OPEC+ group, which Russia is a part of, commands broad control of the oil market because its members account for more than 40% of global crude production. The alliance has been recently increasing output by 400K barrels per day each month after unwinding historic cuts of nearly 10M bpd implemented in April 2020 due to the pandemic. Despite the current turmoil in energy markets, only a modest increase is expected at today's meeting - if any at all - which could fluctuate based on the situation in Ukraine or the world's response to it.

Inflation watch: A general rule of thumb states that for every $10 increase in the price of an oil barrel, U.S. inflation rises by 0.4 to 0.5 percentage points. That's hammering consumers at the pump, with the national average for a gallon of gas standing at $3.65 per gallon, according to data from AAA. "Global energy security is [also] under threat," according to IEA Executive Director Fatih Birol, "putting the world economy at risk during a fragile stage of the recovery. (Source: Seeking Alpha)

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