Oil producers including US weigh reserve releases as war prompts rise in prices

Major oil-consuming nations are considering releasing 70 million barrels as energy prices jump amid concern about supply during the Ukraine war.

Oil producers are weighing whether to release more reserves amid spikes in energy prices. Picture: Frederic J. Brown / AFP

The US and other major oil-consuming nations are considering releasing 70 million barrels of oil from their emergency stockpiles as crude prices surge, European and Persian Gulf officials briefed on the plan say, amid growing concerns over supply after Russia invaded Ukraine.

Oil, natural-gas and grain prices jumped Monday as a broadside of sanctions on Russia over the weekend threatened to ensnare commodities exports from the resource-rich nation. Futures for Brent crude, the benchmark in international oil markets, rose 3.1 per cent to $US100.99 a barrel.

Natural-gas prices leapt 15 per cent before settling 4.8 per cent higher in Europe, where countries’ dependence on Russian gas has been thrown into sharp relief.

The advance in energy prices came as Western sanctions, designed to decouple Russia from the global financial system, led to turmoil in its domestic markets. The country’s central bank more than doubled its interest rates in a bid to stem a plunge in the rouble. BP and Norway’s Equinor, meanwhile, said they would exit investments in Russia’s energy industry.

Members of the International Energy Agency, a Paris-based body which represents mostly industrialised nations, could agree as early as Monday or Tuesday to tap their national strategic oil reserves, according to the officials. It would include 40 million barrels from the US of mostly light grades, they said.

The US has informed Saudi Arabia to ensure that the de facto leader of the Organisation of the Petroleum Exporting Countries doesn’t react to the move by interrupting planned production increases, these people noted. US officials didn’t ask for any additional supplies from Saudi Arabia during a trip to the kingdom earlier in February after being previously rebuffed, people briefed by both sides say.

The IEA declined to comment. The US Energy Department didn’t respond to a request for comment.

Maintaining steady supplies of energy and power in Ukraine itself is also a concern for Western leaders. Ukraine has disconnected from Russia’s electric grid and will link into the European Union’s grid, said the European Union’s energy Commissioner Kadri Simson The fallout from the invasion raised questions about the reliability of Russia as a massive supplier to oil and gas consumers around the world. Russia is the single biggest gas exporter and a major supplier of crude, refined products and other resources, including to the US. Revenue from overseas energy sales is vital to financing the Russian state, including its war machine.

A big portion of the gas Europe imports from Russia transits through Ukraine. So far there have been no interruptions to that supply, though a fuel depot in the town of Vasylkiv, south of the capital, caught fire after it was hit over the weekend.

Sanctions so far have spared energy exports. U.S. and European leaders are concerned about blowback from voters if the war leads to a spike in transportation and heating bills. But restrictions on Russia’s economy have escalated faster than many in the energy industry anticipated, hitting, among other targets, the as-yet unused Nord Stream 2 gas pipeline connecting Russia to Germany. Traders fear further sanctions will directly limit Russian oil and gas shipments or the ability to finance and pay for them.

Russian crude and fuel oil is plugged into refiners in Eastern Europe, the Mediterranean and the US Gulf Coast to generate gasoline and diesel. Some cargoes sold from Russia’s Black Sea port of Novorossiysk last week are still arriving in northwest Europe and the Mediterranean, a trader said. But the trader said no shipments are due from early March because of the risk of sanctions and military strikes in the Black Sea.

Another danger to energy supplies, analysts say, is that Mr. Putin could seek to inflict massive damage on Europe’s economy and population by turning off the gas taps. The Russian state holds a controlling stake in Gazprom, the region’s main gas supplier, and a dominant shareholding in giant oil producer Rosneft.

“It’s going to be extremely volatile,” said Thierry Bros, a gas analyst and professor at Sciences Po Paris. ” Vladimir Putin could at any time decide to reduce supply.” For oil markets, a key dynamic will be the response to the conflict by OPEC. Russia has led an allied group of energy producers that has co-ordinated with OPEC to throttle output and then gradually bring barrels back to market as demand recovered from Covid-19 shutdowns. Analysts expect the combined group, known as OPEC+, to proceed with those plans at a meeting Wednesday.

A powerful round of sanctions set out by the USand its allies over the weekend included an agreement to eject some of Russia’s banks from the global financial system’s payments infrastructure, Swift. By cutting only some banks, Western countries are allowing payments, including for energy, to continue through non-sanctioned banks.

Some analysts say booting Russia from Swift outright would cause short-term turbulence in energy markets, but that traders and brokerages will find workarounds. “The history of Iranian sanctions clearly shows that this is not a game stopper,” said Christof Rühl, senior research scholar at the Center on Global Energy Policy at Columbia University.

Pierre Andurand, whose $US1.1bn hedge-fund Andurand Capital Management specialises in oil markets, said the Western economies could cope if sanctions make it hard to export Russian oil. Russia exports 6.5 million barrels of oil a day, 2 million of which go to China and will keep flowing, Mr Andurand said. If China buys some more Russian oil at discounted prices, the rest of the world would be seeking to make up for 3 million barrels a day of lost supply, which it could meet with spare production capacity in the Gulf and strategic-reserve releases.

For now, European companies keep buying Russian gas in huge quantities. About 80 million cubic meters was booked to enter the EU at the Ve ké Kapušany checkpoint on Ukraine’s border with Slovakia onn Monday, according to the Slovak pipeline operator.

The Wall Street Journal.