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Oil could hit US$240/bbl if more Western countries join US embargo

Published by , Editorial Assistant
World Pipelines,

Oil prices could hit US$240/bbl 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 on Russian energy from the West.

Although fortunately not the most likely scenario, 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 bpd hole in the market that simply cannot be quickly replaced by other sources of supply. Oil prices must therefore rise to destroy sufficient demand and incentivise a supply response through higher activity – both of which happen with a time lag of several months – to rebalance the market at a higher supply/demand/price intersection.

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 US$240/bbl 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.

Global market volatility could compound in the coming months and closely resemble the path seen in the natural gas markets in the last year. It is clear that oil prices will continue to rise until they reach an unsustainable level that curtails demand. That threshold could potentially be as much as US$240/bbl, which would curb international market demand sufficiently over the coming six months through both a direct price impact and an indirect GDP impact.

The higher prices go, the larger the chances of the global economy entering a recession already in 4Q22. Oil at US$240/bbl would trigger a global recession and self-destruct the price level within just a few months, after which prices would fall sharply.

In the worst potential crisis for the oil market since the 1990 Kuwait invasion by Iraq, prices may again need to double in the coming months if all western exports of Russian-associated crude is either embargoed, shunned or by other means needs to be replaced.

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