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Monday, August 8, 2022

Oil Jumps Again on Rising Ukraine Concerns as Tense Week Opens

(Bloomberg) — Oil extended a powerful rally as geopolitical tensions over Ukraine ticked higher at a time of soaring global demand, with physical indicators pointing to growing near-term scarcity.

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West Texas Intermediate rallied more than 1% to hit the highest since 2014, building on eight weekly gains. In signs of market tightness, physical barrels priced off a key global benchmark hit unprecedented levels, and the spread between between Brent’s two nearest futures contracts neared $2 a barrel.

See also: Key Oil Swap Widens to Record as Buyers Hunt for Barrels: Chart

The latest upswing for the world’s most important commodity comes after a flurry of diplomacy over Ukraine at the weekend — including a telephone call between presidents Joe Biden and Vladimir Putin — failed to calm tensions. While Washington has warned an attack on Ukraine may be imminent, Moscow has repeatedly denied that it plans to invade its smaller neighbor.

Crude has surged as the crisis in Europe reinforced a rally that’s been underpinned by soaring worldwide demand, supply interruptions and declining stockpiles. Its run of weekly gains was the longest since October, before the emergence of the omicron virus variant. An invasion of Ukraine, coupled with retaliatory U.S.-led sanctions, risks upending global energy flows.

“$100 oil is in sight,” said Howie Lee, an economist at Oversea Chinese Banking Corp., warning a full-blown conflict between Russia and Ukraine may send crude well above that. “Supply constraints have been the main driver for oil prices going to $100, even with demand staying at current levels.”

U.S. National Security Advisor Jake Sullivan told CNN on Sunday that there’s “a distinct possibility” of major military action very soon. The same day, Biden spoke with Ukrainian President Volodymyr Zelenskiy, telling him that the U.S. and others would act “swiftly and decisively” in the face of any aggression.

Oil markets are severely backwardated, a bullish pattern that’s marked by near-term prices commanding a premium to longer-dated ones. Brent’s prompt spread — the difference between its nearest two contracts — widened to $1.90 a barrel in backwardation, up from 71 cents a month ago.

Similarly, Brent’s Dated to Front Line swaps — a gauge used to bet on the difference between physical prices and futures — widened to a fresh record of $2.37 a barrel on Monday, according to Bloomberg Fair Value data.

Goldman Sachs Group Inc., a long-time oil and commodities bull, said that signs of physical scarcity have begun to materialize, with rising cash premiums for crude showing the difficulty consumers now have in getting hold of supplies. The bank also warned of hoarding in a Feb. 11 note.

The gains in crude have fanned global inflationary pressures as leading economies extend their recovery from the coronavirus pandemic. That’s squeezing consumers as gasoline and other oil-product costs roar higher, and complicating the task for central banks including the U.S. Federal Reserve.

Oil traders are also tracking talks under way in Vienna to try to broker a revived nuclear deal that could allow more Iranian crude onto global markets, potentially cooling prices. Tehran has raised forecasts for revenue from oil exports by almost a third in its draft budget for the next Iranian year.

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