Crude powers higher into overbought territory
Oil benchmarks have surged higher in recent sessions amid growing fears of an imminent Russian invasion of Ukraine. Brent crude hit its highest level since 2014 yesterday at $94.68, after US officials warned that Russia was ready to launch an assault “at any time”. However, signs of a more diplomatic approach by Moscow are seeing some sellers enter the market this morning with prices heavily overbought on a technical basis.
Volatility has been elevated recently with markets gyrating to any fresh headlines concerning Russia/Ukraine developments. This geopolitical issue is dominating price action at present and is likely to continue in the near term as uncertainty means assets like oil price in a fairly large risk premium. Of course, any suggestions that President Putin is willing to come to a more peaceful outcome with the West do offer some comfort, with oil prices set to pull back.
Conflict and sanctions amid tightening markets
Russia is the second largest crude oil exporter after Saudi Arabia and any potential action taken by the West would likely push the global market into deficit and be extremely bullish for oil. Europe would likely feel the impact the most as around a quarter of its imports come from Russia.
The European natural gas market is also extremely tight at present and any further cut in Russia gas flows to the region would leave the continent exceptionally vulnerable. Russia currently supplies between 40-50% of European gas imports, hence the EU seem much less willing to adopt an overly aggressive approach to President Putin.
Back to surplus in the second quarter?
The more positive headlines around Russian forces potentially pulling back from the Ukraine border has seen oil prices retrace this morning. Looking forward, the continued unwinding of OPEC+ supply cuts, along with strong non-OPEC supply growth could see the global oil market return to surplus in the second quarter of this year. Numerous supply issues into the new year and good demand have delayed this return. Iranian nuclear talks will also have a bearing on this equation, with continued progress likely to hold back the market to a certain degree.
The natural gas market is a different beast, and its current tightness will be tough to solve in the near term. EU gas storage is way below the five-year average at this time of year so low inventories and protracted question marks over Russian gas flows may remain for an extended period.
Time for breather
When we wrote about crude at the start of the year, we mentioned Blackrock’s Ten Surprises of 2022 and the prospect of $100 oil if major oil-producing countries were not able to raise output enough to meet demand. Geopolitics has certainly helped along the way, but prices look technically overbought on several measures. Support sits at $93.96 and then around the $90 area. The previous top from October last year at $85.79 is crucial for bulls if a more peaceful outcome prevails and we see more selling.