Will oil break the 2008 record of $147 a barrel?

Prices are headed towards the $150 per barrel mark, but a sustained move above these levels could 'bend the global recovery'

Oil price volatility has declined at a time when regional equity bourses have become more sensitive to disruptions. Reuters

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Oil prices touched their highest level since 2008 on Tuesday, surging past $130 a barrel, after US President Joe Biden banned crude, gas and coal imports from Russia in retaliation to Moscow's military offensive in Ukraine.

The UK also said it will suspend the imports of Russian oil and oil products in a phased manner by the end of 2022, and is also considering a ban on natural gas from Moscow.

Following the move by Washington and London, Russian President Vladimir Putin signed a decree that restricts the import and export of specified goods and raw materials, according to lists determined by the Russian government, which will be in effect until the end of this year, Interfax news agency said.

No further details were provided.

The turn of events led to a brief rally in oil prices on Tuesday and prices have remained at 14-year highs on Wednesday.

Brent, the global benchmark for two thirds of the world's oil, was trading 0.95 per cent higher at $129.20 a barrel at 1.20pm UAE time on Wednesday, while West Texas Intermediate, the gauge that tracks US crude, was up 0.44 per cent trading at $124.20.

Brent hit a record high of $147.02 on July 11, 2008 amid the global financial crisis, while WTI rose to $146.90 the same day.

While the tightening of US sanctions has certainly shaken the market, a bigger impact will be felt if Europe follows suit and bans Russian crude imports.

In 2021, the EU imported 155 billion cubic metres of natural gas from Russia, accounting for about 45 per cent of its gas imports and close to 40 per cent of its total consumption, according to the International Energy Agency.

Moscow has also said it retains the option to cut natural gas supplies to Europe through the Nord Stream 1 pipeline if the EU bans its crude imports.

Russia's Deputy Prime Minister Alexander Novak, who is also in charge of energy affairs, issued a warning that prices could go beyond $300 a barrel if the EU follows in the footsteps of the US and the UK, forcing Moscow to retaliate.

Meanwhile on Tuesday, at the energy industry's CeraWeek conference in Houston, Texas, Occidental chief executive Vicki Hollub said oil may reach $150 a barrel due to the Russia-Ukraine conflict.

Threats of additional energy sanctions on Russia and price forecasts are doing little to ease market volatility, so where are oil prices headed?

Here is what analysts have to say:

Bjornar Tonhaugen, head of oil markets at Rystad Energy

Oil prices could hit $240 per barrel this summer in the worst-case scenario if western countries roll out sanctions on Russia’s oil exports en masse. Market volatility is at an all-time high, with prices surging on the expectation that supply will further tighten due to restrictive sanctions.

Traders, analysts and decision-makers alike should prepare for elevated prices based on the current landscape. This is the largest energy crisis in decades and the impact on the world’s most important commodity is going to be unprecedented.

If more western countries join the US and impose oil embargoes on Russia, it would create a 4.3 million barrels per day (bpd) hole in the market that simply cannot be quickly replaced by other sources of supply.

If 4.3 million bpd of Russian oil exports to the west are halted by April 2022, and where China and India only keep current import levels intact, Brent would need to spike to $240 per barrel by the summer of 2022 to destroy demand.

This collapse would be the largest potential oil supply shortage since the 1990 Gulf War, when oil prices doubled.

Edward Bell, senior director of market economics at Emirates NBD

Oil markets are going to essentially price out Russian exports following the import ban announced by the US and UK overnight. While Russia may continue to produce oil and export it for now, it is essentially going to be untouchable as no part of a trade — whether it is the trader, ship operator, insurer, bank [or] port — will want to risk the threat of US sanctions.

So, oil markets will move to a larger “perceived” shortfall even if the physical market doesn’t see an imminent change.

With that in play, the near-term risks for oil are skewed substantially to the upside and a retest of the $139 per barrel level that we saw earlier this week would probably be the first stop on the way higher. If there is no relief via higher production from other Opec+ countries, which so far hasn’t been the case, then oil prices could certainly test higher and a push to $150, above the peak hit in 2008, could certainly be feasible.

Monica Malik, chief economist at Abu Dhabi Commercial Bank

The direct impact of the US ban on Russian oil imports is expected to be relatively limited but the market is increasingly concerned about supply disruptions to Europe. The oil price is expected to remain highly volatile with the fast changing developments.

In the worst case scenario, a sustained disruption of oil exports from Russia and no new counterbalancing supply could push the oil price well above $150-per-barrel level and towards $200. However, this would result in meaningful demand destruction and there are also many other scenarios in between. Any gas disruption will be harder to cover.

Giovanni Staunovo, strategist at UBS

While the US (around 700,000 barrels per day) and the UK (nearly 200,000 bpd) crude and oil product imports are small in the oil market, with demand north of 100 million bpd ... in a tight oil market with falling oil inventories and dwindling spare capacity, any barrel which gets disrupted is one missing barrel.

Another concern of market participants is that other countries might follow and implement a ban. The magnitude of the price response depends also on how much Russian barrels get disrupted. While we likely will see a stronger supply response driven by higher prices (for example, US shale), those barrels will only come with a delay and not help in the near term.

Ipek Ozkardeskaya, senior analyst at Swissquote

The joint decision by the US and the UK to ban the Russian oil sent another shockwave to commodity prices yesterday.

European natural gas prices spiked to [record] highs and crude oil rallied to the $130 mark but the rise was manageable, confirming that the embargo on Russian oil was already widely priced in. Therefore, the market reaction to the Russian oil ban hints that the upside potential may be exhausted in the short run.

In the medium-to long-run, we may see an advance to the $140 to $150 range if the war in Ukraine continues. Yet, a sustained move above these levels would bend the global recovery, hit global demand and trigger a meaningful downside correction to more affordable levels.

Still, I wouldn’t short oil now as the positive trend is very strong and swimming against such a strong tide could hurt.

Ehsan Khoman, head of emerging markets research at MUFG Bank

The US and UK joined Canada in banning imports of Russian oil, rubber-stamping the 'self-sanctioning' that has been taking place among buyers, finance houses and shipbrokers that have been increasingly skittish to move the nation's barrels ever since the first iteration of sanctions were rolled out.

Critically, while the move is symbolic — given the trivial amount of Russian crude and products that both the US and UK import — the formalised sanctions signal a drawn-out conflict with insurmountable implications for global oil markets over the coming months ahead.

The sheer velocity of Russian crude and refined products exports that are either now off the market — through 'self-sanctioning' or sanctions outright — will march oil prices to $180 a barrel by the summer, if not earlier.

Jeffrey Halley, senior market analyst at Oanda

The [US'] move was well telegraphed, with oil markets having already moved higher this week in anticipation. What stopped any further squeeze was the entirely sensible decision by Europe not to follow the US lead. Quite simply, the eurozone cannot instantly replace Russian imports, but one can be sure they will over time.

But European markets remain vulnerable to unilateral energy bans coming the other way from Moscow.

For all the $200 a barrel predictions, which would certainly cause a recession around the world, I harbour doubts we will see those levels. The price for replacing Russian energy will be some countries and sectors coming in from the cold, and I have no doubt that will happen.

I don’t rule out $150 per barrel for Brent crude but unless Russia ups the stakes or the West decides to [impose a] no-fly zone over Ukraine, I am not having $200 [a barrel] nightmares at night.

Naeem Aslam, chief market analyst at Avatrade

The only easy fix for banning Russian oil is to have more oil production from two countries with which the US doesn't have great relations, Iran and Venezuela.

Traders fear that current decisions taken by the US and its allies are likely to accelerate the economic slowdown trends as the current sanctions are mainly about disrupting supply chains. In addition, sanctions are also driving up energy and food prices, further flattening the yield curve.

Previous recessions chiefly created shocks on the demand side, and those shocks were mitigated by lowering interest rates, purchasing bonds, lowering taxes. However, the current invasion by Russia of Ukraine and the subsequent sanctions are supply-side shocks that have reduced global production capacity and, thus, cannot be offset in the same way. This particular fear keeps traders on edge and brings mammoth volatility to the market.

Han Tan, chief market analyst at Exinity

Oil benchmarks have persisted with their parabolic climb, with Brent still trading around its highest levels since 2008 and making further headway towards the psychologically important $140 level.

Over the near-term, Brent futures could breach their 2008 peak if more countries join in the ban on Russian oil imports, further exacerbating the supply crunch. A Russian curve ball that scuppers the Iran nuclear deal’s prospects may also trigger a knee-jerk spike in oil benchmarks.

Yet, oil’s surge cannot continue indefinitely. The US and UK’s decision to ban imports of Russian oil is set to fan the flames of global inflation, which in turn raise the spectre of demand destruction.