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Russia’s invasion of Ukraine has triggered a global commodity market shock. And there may still be significant upside for crude oil, already trading near 14-year highs well north of $100 a barrel, as the U.S. and its allies reluctantly begin to target Russian energy supplies, according to one of the world’s top commodity traders.
“Anything could happen,” said Doug King, who runs RCMA’s Merchant Commodity Fund, in a Tuesday phone interview, but the uncertainty accompanying war also means there’s scope for violent price swings to the downside as well, he warned.
Russia is the world’s second-biggest petroleum exporter and usually exports 4.5 million barrels of crude and 2.5 million of oil-products each day. West Texas Intermediate crude for April delivery
CL.1,
CLJ22,
the U.S. benchmark, rose $4.30, or 3.6%, to close at $123.70 a barrel on Tuesday after President Joe Biden announced a U.S. ban on Russian oil and other energy imports.
Read: Why the U.S. ban on Russian oil imports differs from the 1970s embargo for markets
May Brent crude
BRN00,
BRNK22,
the global benchmark, jumped 3.9% to end at $127.98 a barrel on ICE Futures Europe on Tuesday. WTI and Brent both closed Tuesday at their highest since the summer of 2008, rallying by more than a third since Feb. 23, the day before Russian President Vladimir Putin launched the invasion. Oil futures pulled back early Wednesday.
If Russian crude was fully targeted by Western sanctions, oil could go “hugely higher from even here,” said King, who serves as chairman of RCMA. And while lifting sanctions on Iran could eventually help fill some of the hole, as would further releases from strategic reserves maintained by member countries of the International Energy Agency, a painful round of demand adjustment would still be needed to get the market back in balance, he said.
“Obviously the world could go into demand destruction phase because you’ve just sucked 6% of the world’s oil off the market,” which was already “incredibly tight” before the war.
The war has put at risk a huge amount of critical commercial market infrastructure at risk and there’s no one with the ability to easily fill the gap, including the Organization of the Petroleum Exporting Countries, which doesn’t have the spare capacity to step in, King said, noting the cartel’s inability to meet monthly increases in its production targets.
In One Chart: Why OPEC+ can’t hit its oil production targets — and what it could do about it
Analysts are making the case for crude at $200 a barrel or more, while Russia’s deputy prime minister has warned that full-fledged sanctions could send oil to $300 a barrel or more.
King said its difficult to estimate how high crude could ultimately go but the uncertainty of war means it isn’t a one-way bet, which makes trading crude and other commodities extremely difficult right now, he said.
“There could be a cease-fire any moment, or Putin comes to his senses,” he said. “Then you would have volatility the other way.”
The Merchant Commodity Fund, which has assets of around $400 million, saw a 74% gain in 2021, King said. For 2022, the fund was up 28% through the end of February, maintaining a “structured bullish book.”
The shutdown of Black Sea ports and a reluctance by market participants to buy ship-bond Russian crude despite earlier efforts to exempt energy flows from sanctions has contributed to a sharp “backwardation” in oil futures, commodity analysts have noted. That’s commodities markets terminology for the phenomenon in which the spot price and nearby contracts trade at a premium to later-dated contracts.
Some analysts have argued that the historically steep backwardation is a market signal that pressures should moderate in coming months.
King doesn’t think so. “Why would I be selling [December] ’23 Brent
BRNZ23,
at $92 a barrel?” he said, arguing that commodity futures curves “tend to react very slowly to changes in supply/demand economics at the forward margin.”
