By Peter Nurse
Investing.com -- Oil prices soared Tuesday, climbing above $100 a barrel, as Western allies threatened more sanctions on Russia with fighting continuing in Ukraine, intensifying fears that energy supplies from the world’s second largest crude producer will be disrupted.
By 8:50 AM ET (1350 GMT), U.S. crude futures traded 4.5% higher at $100.06 a barrel, climbing to its highest level since July 2014, while the Brent contract rose 5.1% to $102.96, closing in on last week’s seven-year high of $105.79 a barrel.
U.S. Gasoline RBOB Futures were up 4% at $3.0504 a gallon.
Russian troops poured into and bombed Ukraine and Western powers responded with tough sanctions, excluding some Russian banks from the SWIFT financial messaging system while also neutralizing the Russian central bank's $640 billion reserves.
However, this has had no immediate limited impact on Russia’s military movements, prompting Western politicians to threaten further measures.
The European Union is discussing the exclusion of more Russian banks from SWIFT, while U.S. Treasury Secretary Janet Yellen is being urged to block Russia from exchanging the $17 billion in International Monetary Fund reserves it received last year and oppose any further allocations.
“We believe that the market has priced in some limited supply disruptions, but certainty not a scenario of sanctions on energy exports. As a result, this does leave upside risk if the situation was to deteriorate further,” said analysts at ING, in a note.
Morgan Stanley lifted its oil price forecasts earlier Tuesday, with the U.S. investment bank now seeing Brent averaging $110 a barrel in the second quarter, up from the previous forecast of $100, with the events in Ukraine having introduced a “risk premium in oil prices that is likely to remain in coming months.”
Russia accounts for about 10% of global oil supply, and any disruption to this supply is likely to severely hit a market that is already struggling to meet surging post-Covid demand.
The breakdown in the relationship between Moscow and Western powers could also have an impact on the negotiations for Iran to return to the 2015 nuclear deal.
Russia and the West have worked closely together for a number of months to try and get Iran to recommit to the agreement, with the Persian Gulf country reducing its nuclear ambitions in return for the removal of sanctions on its oil exports.
Both Tehran and Washington have said there are still some significant differences to overcome, and Russia has been seen as instrumental in shaping a compromise - before now.
The industry-funded American Petroleum Institute releases its estimate of weekly U.S. crude inventories later in the session, while the International Energy Agency holds an extraordinary meeting later Tuesday.
The IEA is expected to discuss the potential release of crude stocks from strategic reserves following reports the U.S. and other countries are considering such a move.
“A stock release should offer some short term relief to the market,” ING added. “But in the longer term, if there are significant disruptions to Russian oil flows, we will need to see some longer-term solutions. This could include OPEC+ members increasing output more aggressively and/or fast tracking the Iranian nuclear deal.”
The Organization of the Petroleum Exporting Countries and allied producers, including Russia, a group known as OPEC+, meets on Wednesday, and is widely expected to stick to the existing policy of gradual oil-output increases.