Brian L. Milne, Energy Editor, Schneider Electric
The weekend invasion of Ukraine by Russia has spiked global crude oil prices, hiking the geopolitical risk premium in crude values while the Obama administration has asked European countries to cut their oil and gas contracts with Russia, and to instead source crude from Africa, the Middle East and the United States.
Russia’s incursion into Crimea, a region in Ukraine with a large coastline along the Black Sea while home to many Russians, has sparked condemnation from Western countries, with the U.S. looking to deploy sanctions to punish Russia, which might also be kicked out of the G-8 for the aggression.
Russia is one of the world’s largest oil producers and exporters with output topping 10.0 million bpd. The Energy Information Administration said Russia exported roughly 5 million barrels per day (bpd) of crude oil and approximately 2 million bpd of oil products in 2012. During that year, 84% of those exports went to Europe with 18% shipped to Asia.
Russia has also used its large energy resource base as a political weapon in the past, namely in price disputes when it would cut off natural gas exports to Europe in the dead of winter.
The rapidly unfolding events in the Ukraine show tensions between Russia and the West heightening, increasing the risk to global oil supply. Crude prices spiked in recognition, with ICE Brent crude futures trading at its highest price point in 2014 over $112 bbl while NYMEX WTI crude futures rallied over $105 bbl to its highest value in 5-1/2 months.
The rally in crude prices on the prospect of lower supply comes immediately on the heels of concern over global oil demand that was set to press crude values down, with worry over slowing growth in China and deflation fears in the euro zone reinforced by a downside adjustment in US economic growth for late last year. In their second of three estimates, the Bureau of Economic Analysis reported Feb. 28 US fourth quarter 2013 Gross Domestic Product increased at a 2.4% annualized rate, down from an initial reading of 3.2% growth.
Signs of strong economic growth late last year was seen accelerating this year, driving demand for oil higher. The lower GDP reading which follows mixed to soggy data on manufacturing, housing and retail in early 2014 was seen capping the upside for US crude prices. Indeed, technical features showed the NYMEX WTI contract in position to decline after failing to attract follow through buying to push above February’s $103.80 barrel high.
The upside in crude values comes as April delivery takes over as the nearby delivery RBOB contract, with the March contract expiring Feb. 28 at a nearly 19-cent discount to April. The transition to April delivery left a wide rollover gap on the spot continuation chart as it pushed the spot-month contract above $3 gallon for the first time since August 2013, while flipping the forward curve into backwardation, a bullish market structure.
The Energy Information Administration’s (EIA) US retail gasoline average was $3.444 gallon on Feb. 24, a five-month high. Wholesale gasoline costs through the week-ended Mar. 3 were mostly higher with small increases with the exception of the Upper Midwest, where they spiked. The average could increase another 30-40 cents from late February through late April, early May.
About the Author
Brian L. Milne is the Energy Editor for Schneider Electric—a global specialist in energy management. Milne has been focused on the energy industry for 18 years as an analyst, journalist and editor. He can be reached at [email protected]