Our Equities Trader, Joseph Raad, discusses macroeconomic themes for the month of March.
The current geopolitical tensions between Russia and Ukraine has sparked an amazing rally in energy prices. With existing supply chain restrictions from the pandemic being felt globally, Russia’s invasion may result in a further supply shock that could see the price of Brent crude oil climb to as high as US$125/bbl by May, according to Goldman Sachs.
One could expect to see further potential gains in both the prices of Brent and West Texas Intermediate (WTI) crude oil, however, the former is more sensitive to the current global climate. While both are ideal for refining into gasoline, Brent is produced from oil fields in the North Sea between the Shetland Islands and Norway, while WTI is sourced from U.S. oil fields. OPEC uses Brent as its pricing benchmark and controls most of the global oil production and distribution. Times of crisis tend to result in a significant widening of the spread between the two oils, as WTI is less affected due to it being based in landlocked areas in the United States.
Spare capacity is defined as the volume of production that can be brought on within 30 days and sustained for at least 90 days. According to JP Morgan, global spare capacity in oil has dropped to just 2.8 million bpd; significantly lower than the 5 million bpd that is considered a comfortable spare capacity level. Many believe that because of this, oil prices will continue to rise even if the Russia/Ukraine situation does not lead to further oil flow disruptions.
John Kilduff, partner at Again Capital, told CNBC:
“The various banking sanctions make it highly difficult for Russian petroleum sales to occur now...
Most banks will not provide basic financing, due to the risk of running afoul of sanctions.”
Countries, such as the US, are withholding sanctions on Russian oil and gas exports in an attempt to keep the prices of both energy sources from rising further. Russia provides Europe with 40% of its gas supplies, and although the current supply chain has been uninterrupted thus far, the threat of such sanctions being imposed is growing by the day. Furthermore, while the already implemented banking sanctions are not directly related to energy prices, supply disruptions seem very likely.
According to Evercore ISI:
"Although the sanctions are still being crafted to avoid energy price shocks, we believe this aggressive-but-not-maximalist stance may not be sustainable, with disruptions to oil and gas shipments looking increasingly inevitable."
Oil and Gas Stock Picks
Woodside Petroleum (ASX:WPL) is Australia’s leading natural gas producer, committed to providing sustainable energy solutions. The company's proven track record and distinctive capabilities are underpinned by 65 years of experience in the sector.
Beach Energy (ASX:BPT) is an oil and gas exploration and production company headquartered in Adelaide, South Australia. Beach’s purpose to ‘sustainably deliver energy for communities’ means operating with the highest health, safety and environmental standards. Founded in 1961, Beach today has oil and gas production in five basins across Australia and New Zealand and is a key supplier of gas into the Australian East Coast gas market.
Karoon Energy (ASX:KAR) is a global oil and gas exploration and production company headquartered in Melbourne, Australia, with country offices in Brazil and Peru. Karoon strives to create shareholder value, by first applying its geographical and geotechnical expertise to identify valuable early-stage acreage, then leveraging high equity interests to explore and appraise and finally commercialise opportunities while retaining meaningful equity interests in the assets as they go into production.
Summary
Russia has made a statement assuring its energy clients that there will be no disruptions to energy flows, however, the ambiguity and uncertainty that is shrouding global markets at the moment should see a continued rise in prices until the smoke clears.
Read the Conversation:
Joseph Raad:
“ Geopolitical tensions such as the current climate between Russia and Ukraine can often spark amazing rallies in energy prices with existing supply chain restrictions from the pandemic being felt globally. Russia's invasion may result in a supply shock that could see the price of Brent crude oil climb even further, investors could expect to see further potential gains in both the prices of Brent and WTI Crude oil.
While both are ideal for refining into gasoline, Brent is produced from the oil fields in the North Sea between the Shetland Islands and Norway. Whilst WTI is sourced from US oil fields, times of crisis tend to result in a significant widening of the spread between the two oils, as WTI is less affected due to it being based in landlocked areas in the United States.
Taking into account the tensions between Russia and Ukraine, countries such as the US are withholding sanctions on Russian oil and gas exports in an attempt to keep the prices of both energy sources from rising even further, Russia provides Europe with 40% of its gas supplies, and although the current supply chain has been uninterrupted thus far, the threat of such sanctions being imposed is continuously growing.
If these do come to fruition, JPMorgan predicts that the price of Brent Crude can reach as high as $180 a barrel by year's end. To learn more about how macroeconomic themes affect the market, click the link in the description.”
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