Russia-Ukraine war to keep crude oil prices elevated at high levels

Oil was trading above $120 a barrel Monday morning.

WTI cracked the $100 ceiling in late February after Russian military forces invaded Ukraine, a former Soviet republic. The invasion brought near-universal condemnation on Russia, one of the largest oil and gas producers in the world.

Al Salazar, the managing director at U.S. energy data firm Enverus, said the market was already roiled by the COVID-19 pandemic, lagging production, strong demand, and the transition of renewables, such as wind and solar energy. The war threatens to tighten an already tight market and increase uncertainty exponentially.

On HoustonChronicle.com: Biden torn in competing directions on cutting off Russian oil

Enverus estimates that millions of barrels of Russian crude oil have become “somewhat untradeable” even though Western powers have yet to sanction Russian shipments of crude oil and natural gas. Shippers, however, may be avoiding Russian energy out of fear of getting caught up in Western financial sanctions.

“How long this undesirable tag remains on Russian barrels is up to President Putin,” Salazar said. “With an immediate and material supply response unlikely from OPEC and U.S. shale producers, oil prices seem destined to keep rising until we have material demand suppression.”

The Organization of the Petroleum Exporting Countries and its allies, including Russia, - rubber-stamped production quotas in record fashion last week, agreeing to stick to their planned production increase of 400,000 barrels per day come April. Meanwhile, major U.S. shale oil producers such as Pioneer Natural Resources and Diamondback Energy, have decided to keep barrels in the ground rather than open the spigot to capitalize on high crude oil prices, according to a report last week from London oil broker PVM

Tamas Varga at PVM said the week ahead for crude oil prices will depend on how much Western powers are willing to tighten the financial noose on Russia. If oil prices continue to rise, it could usher in a global recession.

“There is no full-on export ban on oil just yet for a good reason, although financial sanctions are doing significant damage to the oil balance,” he said. “An export ban on commodity sales from Russia will pour more fuel on the fire.”

On HoustonChronicle.com: Protesters at Schlumberger's Sugar Land office call on oil giant to stop business with Russia

PVM estimated the conflict has added between $30 and $40 per barrel to the price of crude oil.

Nevertheless, a growing chorus on Congress is calling for an outright ban on Russian crude oil imports. North America, however, only gets a small fraction of its crude oil from Russia. No Russian barrels came to the domestic market during the week ending Feb. 25, the U.S. Energy Department reported.

The oil market, however, is a global one and no matter who buys Russian oil, the market is tacitly out millions of barrels of oil per day that will be difficult to replace.