Worries of global shortages as Russia intensifies its invasion of Ukraine prompted traders to drive up the price of oil to new multiyear highs on Wednesday while European prices for natural gas skyrocketed to record levels.
The gains for oil came despite an agreement by members of OPEC+ to boost shipments by another 400,000 barrels a day, in line with previous monthly increases.
That development, as well an agreement on Tuesday among members of the International Energy Agency to release 60 million barrels of stockpiled crude, have failed to constrain prices that were on the rise even before Russia’s invasion of Ukraine.
West Texas Intermediate crude jumped 7 per cent on Wednesday to settle at US$110.60 a barrel. Global benchmark Brent oil rose nearly 8 per cent to US$112.93, its highest in nine years.
While oil markets rally, natural gas prices are reaching unprecedented levels in Europe.
European futures contracts for natural gas soared to record highs on Wednesday amid escalating uncertainty over the availability of supplies from Russia. Prices for the benchmark Dutch contract for delivery in April jumped 43 per cent.
Commercial crude oil inventories are at their lowest level since 2014, and producers have limited capacity to immediately boost production. At the end of last year, Canada produced about 4.1 million barrels a day of oil and condensate, including about 3.1 million from the oil sands. Domestic producers have yet to announce major capital spending plans to increase output, despite the surge in prices.
The industry has little ability to boost supplies for export in the short term, said Tim McMillan, president of the Canadian Association of Petroleum Producers.
“As far as medium and long-term, we need to build more infrastructure,” he said. “We’ve got one major oil pipeline under construction today, we’ve got one LNG facility under construction, and that all of a sudden seems very inadequate compared to the global need for democracies like Canada to fill a larger role in balancing these energy markets.”
The Trans Mountain oil pipeline expansion to the West Coast from Alberta faces major delay and a cost overrun. Shell-led LNG Canada is slated to ship liquified natural gas to Asia from Kitimat, B.C., starting in 2025 at the earliest.
Alberta investment agency to sell off Russian assets
Western sanctions against Russia could cause collateral damage, curb growth for major economies
Western countries have imposed a host of economic sanctions against Moscow, including freezing the Russian central bank’s foreign-exchange assets and barring several of the country’s banks from the global financial system’s primary mode of communication, known as SWIFT. But there has been no global boycott of Russian oil exports, which have recently amounted to about 4.5 million barrels a day.
So far, U.S. President Joe Biden and other world leaders have avoided that step, for fear that it could cause oil prices to spike and fuel runaway inflation in their countries. However, the White House said on Wednesday it is open to the idea if Russian President Vladimir Putin intensifies his aggression against Ukraine.
“It’s very much on the table, but we need to weigh what all of the impacts will be. We’re not trying to hurt ourselves. We’re trying to hurt President Putin and the Russian economy,” White House spokeswoman Jen Psaki told MSNBC.
International economic sanctions that are already in place against Russia are having a similar effect to an oil boycott, however. An informal “buyers’ strike” among jittery traders and oil transporters is keeping those exports off the market, Helima Croft, head of global commodities strategy at RBC Dominion Securities, said in a report to clients.
Cargoes of Russia’s Urals crude oil were offered at a deep discount but went unsold on Wednesday, according to Bloomberg.
“While there are no explicit energy sanctions yet, the current central bank sanctions as well as the selective SWIFT action is causing major risk aversion by key market participants,” Ms. Croft wrote. “Moreover, there is also a growing view that these energy carve-outs will soon prove untenable as the Russian war strategy grows more gruesome and civilian casualties climb.”
On the natural gas side, a combination of factors led to the spike in prices, including fears of Russia cutting back sharply on supplies to Europe and the role of sanctions on Russian banks disrupting financial transactions in the energy sector.
There is also growing pressure within Europe to wean itself away from Russian natural gas and hopes for accelerating the shift toward renewable energy, said Clark Williams-Derry, an analyst with the Institute for Energy Economics and Financial Analysis.
“All of these things are creating what you could call sort of a geopolitical risk premium,” he said in an interview from Seattle. “There is extreme uncertainty about how much natural gas is going to be available in the near future and that is driving up prices today.”
Russia supplied an estimated 34 per cent of Europe’s total consumption of natural gas in 2020, accounting for 42 per cent of Europe’s overall imports of the fuel.
Canada could one day be a large exporter of LNG, although after years of false starts by would-be developers it’s unclear how many plants could get built in the next half decade.
Another question is whether they would be best situated on the West Coast or East Coast. For example, it would indirectly help Europe if LNG is exported from British Columbia to Asia because that frees up LNG supplies elsewhere in the world. “It depends on how things work out, but there is Qatar natural gas heading towards Asia that could be shuffled out for Europe,” Mr. Williams-Derry said.
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Jeffrey Jones
Brent Jang