Market panic is here, according to Rystad Energy’s senior oil market analyst Louise Dickson.
In his statement, Dickson noted that Wednesday’s market situation was extreme “by any measure in historical oil pricing terms”, highlighting that it exhibited the largest ever prompt price premium.
“Investors, traders, and politicians alike are scrambling to address the worsening Russia-Ukraine standoff,” Dickson said in the statement.
“The initial upward price reaction after the conflict in Ukraine started six days ago is only intensifying. The current realistic scenario is that a large portion of Russian crude oil, as well as refined oil products, will no longer be palpable to the market and create a supply deficit for the duration of the armed conflict,” Dickson added.
“The market’s ability to access crude from the region because of sanctions or a risk of outright supply losses look set to persist for a prolonged period, given the realities on the ground,” the Rystad analyst continued.
Dickson said the coordinated IEA release of 60 million barrels of stocks not only failed to bring calm to the oil market but further stoked panic as it was a signal from the group that what lies ahead is higher oil prices. The analyst highlighted that the IEA has only released stocks during the Gulf War, Hurricane Katrina and the Libya civil War.
“The release of 60 million barrels, though on paper seems big, is still just a drop in the ocean compared to the 4-5 million barrels per day of Russian crude exports at risk, in addition to the more than two million barrels per day of Russian refined products,” Dickson said.
Dickson highlighted in the statement on Wednesday that Brent had already breezed past $110 per barrel and inched towards the most recent record of $115 per barrel in June 2014.
“The price collapse that followed in January 2015 was driven by a growing supply glut, which is currently not the state of the physical market, nor would it be if Russian supplies are officially sanctioned and disappear from the market in the coming months,” Dickson said.
“Further spikes in the market structure and flat price can easily occur as long as the Russia supply question remains unanswered,” Dickson added.
At the time of writing, the price of Brent crude was trading at $116.84 per barrel.
Security of Russia Energy Flows Becomes Market Driver
In a separate report sent to Rigzone on Tuesday this week, analysts at Standard Chartered highlighted that the security and reliability of Russian energy flows had become a market driver over the past week.
“Prior to the invasion of Ukraine, we thought it unlikely that flows of Russian energy would face immediate constraints, although we expected Europe to attempt to diversify away from those flows in the medium term,” the analysts stated in the report.
“While the initial EU and U.S. reaction to the invasion exempted energy flows, we think the assumption that flows will continue to be insulated from actions taken against Russia has become significantly less tenable,” the analysts added in the report.
In the report, the analysts outlined that they had so far detected few signs that would diminish concerns that any strategic oil release could be too little and too late to act as an effective market management tool.
“The early talk from policy makers prior to the IEA discussion has been of a release of 60-70 million barrels, well below the 100 million barrels we see as the minimum for an effective release,” the analysts stated in the report, which was published before the IEA’s oil release announcement.