Oil edges higher as concerns over supply disruptions mount

Business a.m.

Tensions between Russia and Ukraine, and in the Middle East, led to a surge in oil prices on Monday, with Brent crude, the international benchmark, up by 1.2 per cent to $86.48 a barrel, while West Texas Intermediate, the U.S. benchmark, was also up by 1.4 per cent to $81.78 a barrel. 

As of Friday’s close, Brent crude was up nearly 11 per cent and WTI had risen by 12.5 per cent. The upward trajectory of oil prices this year has been driven by several factors. The first is the expectation that major economies will avoid a sticky recession, with interest rates forecast to fall by the summer. Another factor is the OPEC+ group of oil producers’ decision to extend supply curbs into the second quarter of the year.

The concerns about global oil supply have been compounded by recent attacks on Russian energy facilities and Ukrainian energy infrastructure, as well as the fading hope of a ceasefire between Israel and Hamas, according to Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities. 

A recent drone attack on a Russian oil refinery over the weekend is believed to have knocked out half of its capacity, according to sources who spoke to Reuters. This is the latest in a string of attacks by Ukraine this month, which have resulted in the closure of seven per cent of Russia’s refining capacity, according to Reuters calculations. These attacks come in addition to unrelated maintenance work on other refineries.

Despite efforts by Qatar and Egypt, which are backed by the United States, a ceasefire between Israel and Hamas has not been reached, and Israeli forces have continued their offensive in Gaza on Sunday.

In a separate incident, the U.S. Central Command (CENTCOM) said that U.S. forces engaged six unmanned aerial vehicles (UAVs) belonging to the Houthi rebel group in the southern Red Sea on Saturday. The engagement came after the Houthis launched four missiles towards a Chinese-owned oil tanker.

OPEC’s decision to retain its supply curbs in the face of upgraded oil demand forecasts for 2024 has drawn scrutiny from analysts, including Tamas Varga of oil broker PVM. Varga notes that the demand forecasts have been upgraded as the global economy continues to recover from the COVID-19 pandemic. 

Varga argues that the current buffer in the oil market, created by the demand-supply gap, provides some protection against a major supply shortage. This is a key factor in his argument that Brent crude oil prices are unlikely to remain above $90 a barrel on a sustained basis.