Oil Hits 125 USD, What’s Next?

March 10, 2022 at 10:27 PM

On Monday, the West Texas Intermediary (WTI) benchmark rose to 125 USD, the highest level since 2008. At the same time, the EU benchmark Brent, jumped toward 140 USD.

Oil prices spiked sharply following news that the US was talking with European allies about a potential ban on imports from Russia.

Sanctioning Russian oil would be the most significant escalation in the West's response to Moscow's invasion of Ukraine, and it poses serious negative consequences for the global economy. While Russia's economy will be hurt the most, Europe will likely fall into a severe recession, and US economic growth will also be hit, with consumers getting the most of it. Moreover, the magnitude of the downturn could be even worse than in 2008, as inflation will likely rise toward 20%. 

In 2008, demand destruction occurred when prices approached 140 USD. Adjusting for inflation, prices need to go above 200 USD to have a similar effect on consumption. However, the current spike in prices is not a demand-driven shock but a supply-driven one, and there's no ceiling in sight.

Russia currently exports approximately 4.5 million barrels of crude oil. If exports were cut in half, prices would likely sky rocket in the short to medium-term, even if the US and other nations release oil from their strategic reserves. However, if the crisis gets worse and Europe imposes sanctions on Russian oil with no response from OPEC members, we can see prices jumping toward 200 USD.

Fortunately, so far, Germany has said no to these sanctions. On the other hand, the overall situation might be improving in Ukraine as the Russian Federation and Ukraine foreign ministers had agreed to meet in Turkey, with Sergey Lavrov and Dmitro Kuleba set to meet later in the week on the sidelines of the Antalya Diplomacy Forum. 

Turkish foreign minister Mevlut Cavusoglu said on Twitter that he hoped the step would lead to "peace and stability." The meeting would mark the highest-level contact between the two sides since 24 February, when Moscow started the special military operation in Ukraine.

Any real de-escalation could cause some profit-taking from the current rally. However, as long as oil remains above 100 USD, the bullish outlook seems intact, targeting the 150 USD psychological level.

Since the military conflict started, oil has gone vertical and is up 35% in more than a week. If this trend continues, the world will face inflation it has never seen before. 

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