Oil off 7-year highs, $100 still in sight, Nord Stream 2 halted

Supply fears lift oil prices

Oil surged to a fresh 7 year high in early trade, on fears of supply disruption, as the market digested news that Russia recognized two breakaway Ukrainian states, Donetsk and Luhansk as independent. Under the cloak of “peacekeeping” Putin proceeded to send troops into these regions, heightening tensions in Ukraine. His moves raise fears that he will look to dismantle Ukraine, piece by piece.

The West condemned Putin’s actions and have applied sanctions on Russia, steering clear of the energy sector, well almost. Europe is highly reliant on Russia for energy, importing around 40% of its natural gas from Russia, a level which according to the Qatar energy minister, would be impossible to source from another country rapidly.

Given the low gas storage levels in Europe and surging inflation, any restriction to energy supply would be hard hitting to Europe itself.

Nord Stream 2

Even so the German Chancellor Olaf Scholz halted the certification process for the Nord Stream2 pipeline in response to Russia’s actions. The pipeline which runs direct to Germany was projected to help ease the energy crisis in Europe. The move was seen as one of the strongest measures Europe could take against Russia. Putin said Russia aims to continue uninterrupted supplies of energy, which helped eases prices off session highs, although the oil markets are clearly taking these comments with a pinch of salt as oil trades 2% higher still on the day.

Fears that Russia could opt to weaponize gas or energy supplies is a very real concerns, underpinning prices in the whole energy complex. Oil may have eased back from the session high of $99.40 but oil to $100 is looking highly likely unless there is a massive de-escalation in the current situation.

Iran nuclear deal

The other story to keep an eye on, which is helping bring oil prices lower is the US - Iran nuclear talks, which appear to be reaching their end game. If a deal is reached 1 million bpd of Iranian oil could come flooding back to the market. The prospect of a deal is helping to balance the Russia, Ukraine fears.

Client data

According to our client data, just 8% of our clients were long US crude 11 days ago, that percentage increased to 53% by the end of last week and was 38% yesterday.

 Brent Chart