Brent Crude scales to above $130/bbl on 07th March

The rally in Brent crude is far from over. The rally started around 3 months back in early December 2021 at $69/bbl in the Brent market. Over the last 3 months, the price of crude has rallied nearly 88% to cross $130/bbl. By the close of 07th March, the price of crude had tapered to $125/bbl as many of the oil traders covered their long positions at higher levels. However, at a structural level, the rally appears to be far from over.

For a commodity that moves in a narrow range for most part of the year, oil prices have been rallying by nearly 7-8% on a daily basis in the last few days. Of course, the biggest concern is the outcome of the sanctions. If Russian oil is blocked from the global market, then around 8-10% of the global output vanishes and that is what is actually driving the price of crude so rapidly in the last few days.

In the last major rally in oil prices in 2008, Oil had touched a high of $147/bbl and the crude price is less than $20 away from that levels. Of course, one can argue that in inflation adjusted terms $147 of 2008 cannot be compared to $147 of 2022 and that is a valid objection. But, mathematical niceties aside, the bottom line is that oil is in the middle of a frenetic rally and there seems to be hardly any solid factor to control the rally.

Interestingly, there are also other factors that are impacting the supply of oil and the sentiments surrounding oil prices. Amidst the crisis in Russia, there is a new risk that has emerged for oil supply. The Libyan national oil company has given a statement that an armed group had shut down two crucial oil fields. This had resulted in Libya’s daily oil output dropping by 330,000 barrels. Strange things do happen when oil is ridiculously high.

It is not just the Brent Crude, but even the West Texas Intermediate (WTI) crude has shot up to $124/bbl. In fact, for the first time in history, the price of gasoline in the US has gone above $4 a gallon, a figure that was last seen in 2008. It is very close to the July 2008 prices of $4.10 per gallon and that is when the sub-prime crisis had actually exploded on the face. The hit has been the worst for countries that rely heavily on oil imports.

One such classic example is Japan that nearly imports 100% of its oil needs. This has led to a sharp fall in the Nikkei index. The other classic basket case is India which relies on crude imports for 85% of its oil needs. Both the Indian indices and Japanese indices are down 15% from their recent peaks. China also imports large quantities of oil but they also are among the top-5 oil producers in the world. So, they have something to fall back upon.

For now, it looks like the Ukraine crisis will go on as Russia is unlikely to be deterred by the sanctions and the US and the West are not likely to do a rethink on sanctions. Higher oil prices will have damning implication on global economic growth as well as for the margins of companies. One of the side effects of the sanctions will also be a food crisis since much of Europe and Asia depends on the bread baskets of Ukraine and Russia for their food needs.

If you want proof of the risk off tendency of the market just look at the recent rally in gold and the US dollar. That is the crux of the story.

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