Oil heads toward next target of $125 on fear that Russian fuel will be taken off market

Published Tue, Mar 1 20223:01 PM ESTUpdated Tue, Mar 1 20226:56 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Oil prices surpassed $100 and could be quickly heading toward a target of $125 per barrel, if traders start to find evidence that Russian fuel has a limited market. Energy has not been targeted by Western sanctions, but the market fears Russian barrels will be caught in the swirl of financial restrictions — or even intentionally penalized — if the military action continues. After Russian troops invaded Ukraine, the U.S. and its allies sanctioned Russian commercial banks and the central bank, cutting off most of Moscow's banking system from international markets. "Even if Western governments remain reluctant to pull the trigger on energy sanctions, a full-blown divestiture movement has taken hold, and Russia energy is being treated as a toxic asset by corporates and financial institutions," said Helima Croft, head of global commodities strategy at RBC Capital Markets. BP and Shell have said they are divesting Russian assets. "The only question is how much and how quickly will Russian volumes be reduced," Croft said. OPEC+ meets Wednesday, but Croft said she does not expect the group, which includes OPEC and its ally Russia, to raise output more than planned. They are expected to continue adding 400,000 barrels a day each month until June, when they will have reached their production target. So far, Russian tankers continue to move toward foreign ports, but some countries, such as the U.K., have said they will bar the nation's ships. Russian oil also flows to Europe and China via pipelines. A wall of worry West Texas Intermediate futures for April settled up about 8% Tuesday to $103.41 per barrel. International Brent crude jumped about 7% to $104.97 per barrel. Oil prices surged, even as the U.S. and 30 other countries announced a coordinated release of 60 million barrels from strategic energy reserves. "Oil's climbing a war-induced wall of worry," said John Kilduff, partner with Again Capital. "I think the next target is $125 for WTI and Brent." Kilduff said there is evidence Russian oil is falling out of favor fast. He said there were reports that a shipment of Ural crude was selling for more than $18 a barrel below Brent, and there were still no bidders. Morgan Stanley analysts on Tuesday raised their Brent forecast to $110 for the second quarter from $100 and said their bull case was for $125 oil. They said their previous $100 target was based on market fundamentals of supply and demand, but the geopolitical risk has resulted in a premium that they expect will continue in coming months. Should Russian oil be sanctioned, crude price could jump to as high as $200 a barrel, according to Bank of America. That would be the case if all of Russia's 5 million barrels a day in exports were removed from the market, writes Ethan Harris, head of global economics research at Bank of America. Harris quotes Francisco Blanch, Bank of America's head of global commodities and derivatives research, as saying every 1 million barrels eliminated from the market would result in a $20 per barrel jump in prices. Oil analysts do not see this as a likely scenario, and they expect China will continue to buy Russian crude. About 1.6 million barrels a day flows to China through the East-Siberia Pacific Ocean pipeline. 'No noticeable disruption' The oil market is attempting to weigh just how much Russian oil could come off the market because of the indirect impact from institutions that are affected by financial sanctions. "All the pipeline and tanker tracking data available to us suggests that, as of now, there's no noticeable disruption to the flow of oil from Russia," the Morgan Stanley analysts wrote. Analysts say if the geopolitical tensions were to ebb, there would be an immediate drop in oil prices since there is no shortage of supply and more oil is expected to come to market. According to IHS, 900,000 barrels a day more could come from the U.S. this year, and other new supply is coming from Brazil and Guyana. Another wild card is Iran and whether it can reach an agreement to reenter its nuclear deal. That could clear the way for about 1 million barrels of oil to return to the market in an agreement for an end to the nation's nuclear activity. But for now, the market is watching those Russian barrels. VesselsValue reports that 60 ships, mostly oil tankers and ships that carry grain and other dry cargoes, were heading from Russia to Europe, and were scheduled to arrive between March 1 and March 4. Just four were headed to the U.K., but they are expected to be diverted. A VesselsValue spokesperson said the firm's team is watching for diversions of tankers, but so far they are not seeing evidence of that.

The Siem Garnet tugboat delivers a Japanese-made HAKURYU-5 semi-submersible drilling rig to develop the Ayashsky offshore oil field.

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Oil prices surpassed $100 and could be quickly heading toward a target of $125 per barrel, if traders start to find evidence that Russian fuel has a limited market.