Energy

Oil prices could treble if Russia retaliates to sanctions: JP Morgan

Mon 04 Jul 22, 11:13am (AEST)
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Key Points

  • Oil is experiencing a structural multi-year tightening cycle
  • Russia could retaliate by cutting output as a way to inflict pain on the West
  • The country has the capacity to significantly reduce daily crude production by 5 million barrels without excessively compromising its economy

While brokers are at odds as to where oil prices could go to from here, one thing they can agree on is that they’re likely to move significantly higher.

RBC Capital Markets' postulates that under a recession-based scenario in which oil demand is taxed at similar rates experienced within previous downturns, the oil price could fall back into the mid-US$70 a barrel range during the second half of 2022.

Multi-year tightening

While RBC pegs the likelihood of this outcome at around 15%, the broker believes a structural multi-year tightening cycle [for oil] is a fare more likely outcome.

While it’s anyone’s guess how high oil prices could go under a tightening cycle, the broker believes the commodity could easily reach $200 a barrel.

The broker reminds investors that one key lesson from past cycles is that “oil market pricing can be swift, violent and unforgiving in both directions.”

Russian wild card

Meantime, JP Morgan also reminds investors not to overlook the wild card that Russia could throw into the already tightening oil price cycle.

This could happen if the country decided to cut its output, especially within a market already experiencing record-high gas prices.

While the current price for a barrel of oil stands at around US$110, JP Morgan analysts suspect a move by Russia to cut output could see oil increase three-fold in price.

Russia may not play ball

The Group of Seven nations are currently working out a way to cap the price fetched by Russian oil.

While this is intended to tighten the screws on Vladimir Putin’s war machine in Ukraine, Kaneva fears this strategy could backfire if Russia decides not to participate and hits back by reducing exports.

“It is likely that the government could retaliate by cutting output as a way to inflict pain on the West. The tightness of the global oil market is on Russia’s side.”

Knock-on effect

Based on Moscow’s fiscal robustness, Kaneva argues that the country has the capacity to significantly reduce daily crude production by 5 million barrels without excessively compromising its economy.

However, the knock-on effect for the rest of the world, adds Kaneva could be dire.

Kaneva notes while a 3 million-barrel cut to daily supplies would push benchmark London crude prices to US$190, the worst-case scenario of 5 million-barrels could mean a “stratospheric” US$380 price for crude.

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Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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