Oil Tops $110 With Russian Supplies Struggling for Buyers

(Bloomberg) -- Oil extended its relentless rally above $110 a barrel before an OPEC+ meeting as the severity of disruption to Russian supplies showed signs of growing. 

Futures in London and New York both jumped above the threshold intraday, with West Texas Intermediate hitting the highest since 2013. The market's structure has moved into super-backwardation, indicating extreme scarcity, while prices have also surged through major option strikes, exacerbating price swings.

Russia's flagship Urals crude oil was offered for sale at a record discount but got no bidders, the latest indication that trading of oil from the country's western ports is grinding to a halt. Consultant Energy Aspects said about 70% of Russian crude trade is currently frozen amid banking sanctions, spiking freight rates and wider political risks.

The global oil market had already tightened significantly prior to the invasion, after economies rebounded strongly from the pandemic. The disruption to Russian exports has the potential to drive crude prices even higher. Traders are paying the most in years betting that will happen, while banks including Morgan Stanley have boosted near-term forecasts.

In a bid to cool prices, the International Energy Agency announced a strategic oil reserve release, but so far it has done little to tame a rampant market. The situation across the energy sector is very serious, IEA Executive Director Fatih Birol said Tuesday.

“The next frontier of oil prices will be defined by prices in search of demand destruction,” RBC Capital Markets analysts including Michael Tran wrote in a note to clients. “Two weeks ago, our call for $115 a barrel by summer seemed aggressive, in light of the ongoing tightening fundamental framework, infused by geopolitics, there may be further risk to the upside.”

Brent remains in deep backwardation, a bullish structure where prompt barrels are more expensive than later-dated cargoes, indicating nervousness over tightening supply. The benchmark's prompt spread was $5.02 a barrel, a level not previously seen this century. 

Russia's invasion is entering a deadly new phase, which could result in more sanctions. President Joe Biden is facing pressure from lawmakers in both parties to cut off U.S. imports of Russian oil and gas to escalate the cost to Russia, which would likely provide another boost to global prices.

The impact of Russia's invasion of Ukraine has reverberated far and wide. Oil majors such as BP Plc, Shell Plc and Exxon Mobil Corp are exiting Russia, while banks across the globe including in Singapore are restricting trade financing for raw materials. 

Separately, the American Petroleum Institute reported U.S. crude inventories fell by 6.1 million barrels last week, according to people familiar with the data. Stockpiles at the key storage hub in Cushing also declined, the API said. Energy Information Administration figures are due later Wednesday.

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