Oil prices continued their upward climb for the second consecutive day on Tuesday, reaching multi-month highs as concerns over tightening oil markets due to the war in Ukraine overshadowed positive economic data.
Ukraine Targets Russian Refineries, Disrupting Supply
This surge in oil prices to multi-month highs comes amid growing anxieties about the impact of Ukraine’s recent attacks on Russian refineries. Since the start of the year, at least seven Russian refineries have been targeted by drone strikes, according to Reuters calculations. These attacks have resulted in a 7% reduction in Russian refining capacity, translating to roughly 370,500 barrels per day (bpd) of lost output.
Storage Constraints Raise Fears of Production Cuts
While the decrease in refining activity has initially led to a rise in Russian crude oil exports, analysts warn this trend might not be sustainable. StoneX energy analyst Alex Hodes points out that storage constraints in Russia could force production cuts in the near future. Hodes estimates the Ukrainian attacks could ultimately translate to a global petroleum supply decrease of around 350,000 bpd, potentially pushing U.S. crude prices up by $3 per barrel.
Oil Prices at Multi-Month Highs – Rising Margins and Geopolitical Tensions
Even if the attacks don’t directly impact Russian crude oil production, the war is still exerting pressure on oil prices through surging refined product margins, as explained by SEB Research analyst Bjarne Schieldrop. This phenomenon highlights the broader geopolitical tensions that are impacting the global oil market.
Positive Economic Data Fails to Dampen Price Rally
Despite encouraging economic data from the U.S. – including a sharp rebound in single-family homebuilding – the upward momentum in oil prices hasn’t been significantly dampened. This suggests that concerns over tightening oil markets due to the war are currently outweighing positive economic signals.
OPEC+ Cuts and Demand Growth Support Prices
UBS analyst Giovanni Staunovo attributes the recent price increases to a confluence of factors, including positive oil demand data and the extension of voluntary production cuts by OPEC+ until the end of June. Staunovo predicts Brent crude oil to trade within an $80-$90 per barrel range throughout 2024, with an end-of-June forecast of $86 per barrel.
Oil Prices at Multi-Month Highs
The future trajectory of oil prices remains uncertain. While the war in Ukraine and its impact on Russian refining capacity are major concerns, positive economic data and OPEC+ production cuts provide some countervailing forces. The coming weeks and months will be crucial in determining how these factors play out and ultimately shape the direction of the oil market.
With these opposing forces at play, only time will tell if oil prices can sustain their current multi-month highs or succumb to the pressures of a more balanced market.
