$140 Oil Is Still Possible

The European Union seems to be warming to the idea of direct sanctions on Russia’s energy industry, slapping a ban on imports of coal for starters. The United States is releasing 180 million barrels of crude, and several IEA members are releasing another 60+ million barrels. And Saudi Arabia just hiked its prices for all buyers. Much higher oil prices may be around the corner.

When a few months ago analysts were seemingly trying to out-forecast each other on crude oil prices, the most commonly cited bullish factors were OPEC+’s unwillingness to boost production by more than originally agreed while demand for oil continued strong.

Now, all the news appears to be on the war in Ukraine, and the main bullish factor for oil is the expected continued decline in Russian oil exports. The country is the largest exporter of crude oil and oil products and a big supplier to the European Union, which explains the EU’s reluctance to directly target its energy industry.

Yet pressure is growing on Brussels to do just that, and with coal already on the sanction list, it’s probably only a matter of time before oil becomes a target, too. When this happens, Brent may well top $120 and stay there.

In the meantime, the United States has publicly stated it had banned all Russian oil and fuel imports, but in fact, the ban is only coming into effect on April 22, and in the meantime, the U.S. is stocking up on Russian oil and products.

Per data from the Energy Information Administration, in the week to March 25, the U.S. imported an average of 100,000 barrels of Russian oil and fuels, up from 70,000 bpd in the previous week and zero barrels daily a month earlier.

While all this was happening, oil prices dipped after the announcement of the U.S. SPR release, with West Texas Intermediate even falling below $100 per barrel. Yet the dip was only a brief one, and prices are once again above $100 as fundamentals reassert themselves after the initial market reaction to the Biden administration’s decision for the reserve release.

Now, prices are likely to continue climbing, just like they did after the first Biden SPR release last year, again in an attempt to put a lid on retail fuel prices. At the time, prices reacted with a dip immediately after the news and then rebounded as emotions gave way to facts.

These included the one that oil grades to be released from the reserve were not the ones refiners needed to boost their fuel production and the one that a reserve release can only provide temporary relief at the pump without actually fixing the supply problem.

Now, the release is massive in comparison to the first one. It would amount to 1 million bpd over a period of six months. Theoretically, this would cover a third of the Russian oil export dip as predicted by the IEA. In practice, traders have probably already started to worry about how the administration will replenish the SPR after the release and what that would do to oil prices.

Meanwhile, in Europe, coal prices jumped following the news of a coal import ban on Russia, with European Commission President Ursula von der Leyen saying, “We will impose an import ban on coal from Russia, worth 4 billion euros ($4.39 billion) per year. This will cut another important revenue source for Russia.”

Sadly, it will also raise energy costs for European further, heating up the debate about who are anti-Russian sanctions actually hurting more: Russia or the EU. The European Union imports 45 percent of the coal it uses from Russia, according to European Commission data. That’s 45 percent of coal imports it will now need to replace because cutting coal use sharply is simply not an option.

Incidentally, Indonesia, which is the world’s largest coal exporter, hiked its April delivery prices by as much as 42 percent. This sounds quite similar to what Saudi Arabia did with its oil prices and likely means the same thing: buyers have fewer options now; it’s a sellers’ market.

But coal prices are set to rise further because Russia supplies as much as 70 percent of Europe’s thermal coal, the sort used for power generation and heating. And to make things more interesting, global stocks of thermal coal are tight, according to Rystad Energy.

What does this mean for oil? Based on what we saw with gas and coal prices in Europe last year, the prices of all fossil fuels are linked. When one becomes prohibitively expensive, demand for the others rises. That’s why coal prices soared last year, in fact, as utilities turned from gas to coal in search of a more affordable source of energy.

In this situation, the normal rule of the cure for higher oil prices being even higher oil prices does not really apply, at least not completely. Energy demand is hard to kill, regardless of costs, especially in places like the European Union, where people have lived in complete energy comfort and security for several generations.

Oil prices will likely rise after the EU’s ban on Russian coal. And if the EU decides to go further and target oil itself, things could get really interesting on the price front and on the streets of European cities.