InvestorQ : How do you explain Brent crude crossing $130/bbl on Monday 07th March?
Tisha Malhotra made post

How do you explain Brent crude crossing $130/bbl on Monday 07th March?

Aashna Tripathi answered.
12 months ago

If you thought that the price of Brent Crude had rallied enough, just do a rethink. The rally started in early December 2021 at $69/bbl, and has since rallied 88% to cross $130/bbl. Of course, eventually, the price of crude did taper to $125/bbl but that was only because long traders were offloading positions. That is a temporary relief. At a structural level, the rally appears to have a lot more steam left in the light of the war like situation in Ukraine.

Oil sanctions on Russia are yet to be announced, but remember that if Russian oil is blocked from global markets, around 8-10% of global supply vanishes. That is what is really driving crude so rapidly higher in last few days. Crude is just $20 short of the levels of $147 seen in 2008. Investment bankers like Goldman Sachs are already pegging oil at closer to $200/bbl and while being speculative it is not too far-fetched.

There are new risks emerging trying to capitalize on the oil price spike. The new risk to oil supply has come from the Libyan national oil company. It has recently given a statement that an armed group of militants had shut down two crucial oil fields and taken them over. This had resulted in Libya’s daily oil output dropping by 330,000 barrels adding more pressure to global supply. These are the vices of war and high crude prices.

The countries that are being really hit hard are the net oil importers like Japan and India. Japan relies on imported oil for nearly 100% of its oil needs and India relies on imports for 85% of its oil needs. The Nifty and the Japanese Nikkei are down 15% from their recent peaks. Of course, China also imports large quantities of oil but they are also among the top-5 oil producers in the world, so they do have a natural hedge.

The rally in gold and USD indicate that risk-off strategy will continue for now. Russia is unlikely to be deterred by sanctions and the US and the West want to go the whole hog with sanctions. Higher crude prices will have a deleterious effect on global economic growth as well as for the operating margins of companies. While the sanctions have created an oil crisis, it could also create a food crisis, but I will not get into that discussion now.