Oil prices firmed above $80 to start the holiday-shortened trading week, fueled by geopolitical tensions and tighter global supplies. Crude has joined the broader commodities rally and could add to renewed inflationary pressures throughout the U.S. and global economies.
May West Texas Intermediate (WTI) crude futures picked up about 1.6 percent to finish the Monday session on the New York Mercantile Exchange, settling at $81.95 per barrel. Year to date, U.S. crude prices have rallied about 15 percent.
Brent, the international benchmark for oil prices, also exceeded $86 on London’s ICE Futures exchange. June Brent futures surged roughly 1.5 percent, to $86.57 per barrel, at the end of the March 25 trading session.
Ukraine’s bombardment of Russia’s energy infrastructure was the latest catalyst to ignite oil’s upward push. This past week, Kyiv recently launched an attack at the Kuibyshev oil refinery in Samara, knocking out another central refinery unit.
Great Britain’s Defence Intelligence estimated that at least 10 percent of Russia’s refinery capacity went offline.
“These strikes are imposing a financial cost on Russia’s refinery capacity,” the report stated. “Depending on the extent of the damage, major repairs could take considerable time and expense. Sanctions are highly likely increasing the time and cost of sourcing replacement equipment.”
But while Moscow is likely to endure a substantial financial burden, the plethora of strikes could risk lifting global energy prices. This, according to the Financial Times, is irritating White House officials as the administration has urged the Ukrainian leadership to halt its attacks on Russian oil refineries.
Olha Stefanishyna, Ukraine’s deputy prime minister for European and Euro-Atlantic integration, was asked about Washington’s frustrations before an audience at the Kyiv Security Forum.
“The Ukrainian side responded, I think, precisely by achieving its goals and by very successful operations conducted on the territory of the Russian Federation,” he said. “We understand the appeals of our American partners. At the same time, we are fighting with the capabilities, resources, and practices that we have today.”
Meanwhile, Russia could bolster the increase in oil prices after Reuters reported that the Kremlin had ordered energy firms to reduce crude production levels in the second quarter to meet the output target imposed by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, OPEC+.
Russian Deputy Prime Minister Alexander Novak recently confirmed that Moscow would slash production and exports by an extra 471,000 barrels per day during the April–June period as part of coordination efforts with OPEC+ members.
Russia is estimated to produce approximately 10.8 million barrels per day.
In addition, the Red Sea plays a significant part in global energy markets, says Phil Flynn, an energy strategist at The PRICE Futures Group.
Back at Home
Domestic production has been at or above pre-pandemic levels, but the figures have not been enough to curb the jump in oil prices.The latest Energy Information Administration (EIA) data show that for the week ended March 15, U.S. crude output was 13.1 million barrels, unchanged from the previous week.
According to Mr. Flynn, the slowdown in the number of active drilling rigs has contributed to the rally in oil prices.
The Baker Hughes Oil Rig Count dipped by one, to 509, for the week ended March 22. This is down 14 percent from the same time a year ago.
Total rigs, which includes gas, tumbled by five, to 624, in the same span. This is also down about 18 percent year over year.
The decreases in rig counts emanate from high-cost locations, says Anas Alhaji, a managing partner at Energy Outlook Advisors.
“Gas-directed rig count in the Haynesville is at its lowest level since October 2020. Total gas-directed rig count is at its lowest since January 2022,” he said in an analyst note. “We all know that the industry decided to cut spending and lower the rig count. The cut is coming from high cost areas. We expect the gas rig count to go even lower in order to rebalance the market.”
Despite the slowdown in drilling activity, ING commodity strategists are confident the elevated prices will support industry investments.
They wrote in a March 25 note that “the strength in oil prices will keep supporting investments in oil exploration activities,” adding that speculation surrounding Federal Reserve policy should boost “speculative interest.”
“With the expectation that the U.S. Federal Reserve will start to ease its monetary policy later in the year, this could see speculative interest picking up, providing some further tailwinds for the oil market,” they added. “Obviously, this would be the case for most risk assets once the Fed enters its easing cycle.”
That said, due to the latest developments in international energy markets, U.S. motorists are paying more for gasoline than they did a year ago.
Recent American Automobile Association (AAA) data highlight that the national average for a gallon of gas is slightly above $3.53, up nearly 3 percent from a year ago.
Where Are Prices Headed
In its recent Short-Term Energy Outlook (STEO), the EIA anticipates Brent crude oil prices will average $87 in 2024. Gasoline retail prices are also expected to average $3.48 this year.This is roughly in line with ING’s 2024 forecast of $86 a barrel amid tightness in international supplies.
“The roll over of supply cuts from OPEC+ means that the oil market will shift from a surplus environment in the second quarter of the year to a deficit environment,” ING strategists said. “Expectations of a tightening in the market are reflected in the forward curve, with timespreads having moved deeper into backwardation.”
Economists and market analysts have warned of a second wave of inflation if energy prices continue to advance.
