Under a worst case scenario, where more Western countries apply sanctions on Russia’s exports, oil prices could double and hit US$240 per barrel in the coming couple of months, in what has been dubbed the largest energy crisis in decades.
During the 1900 Gulf War, oil prices doubled.
“Market volatility is at an all-time high, with prices surging on the expectation that supply will further tighten due to restrictive sanctions on Russian energy from the West,” says Bjørnar Tonhaugen, head of oil markets at Rystad Energy, Norway-based industry consultancy.
“Although fortunately not the most likely scenario, traders, analysts and decision-makers alike should prepare for elevated prices based on the current landscape,” warns Tonhaugen.
If more Western countries join the US and impose oil embargoes on Russia, it would create a 4.3 million barrels per day (bpd) hole in that cannot be quickly replaced by other sources of supply, he explains.
Oil prices must therefore rise to destroy sufficient demand and incentivize a supply response through higher activity. However, there will be a time lag of several months.
Assuming if 4.3 million bpd of Russian oil exports to the “West” are halted by April 2022, and where China and India only keep current import levels intact, Brent would need to spike to $240 per barrel by the summer of 2022 to “destroy” demand.
It is clear that oil prices will continue to rise until they reach an unsustainable level that curtails demand.
From the perspective of Rystad Energy, that threshold could potentially be as much as US$240 per barrel.
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By then, international market demand would be sufficiently curbed.
Now, if prices hit that level, a global economic recession might be triggered in 4Q this year, he warns.
Photo: Bloomberg
