War In Ukraine Could Push Barrel Past US$185

JP Morgan claims in a recent study that sanctions on Russia, which could include a blanket ban on Russian oil imports, might raise the price of the barrel over US$185. 

This is a departure from a previous JP Morgan study released at the end of March, which claimed that the war in Ukraine would result in an overall decrease in oil prices due to its impact on demand. Arguably, this prediction is currently being followed by the markets, with Brent crude prices decreasing by 5 percent to reach US$107/b this week. The decrease was mostly based on the most recent global economic growth forecasts by the International Monetary Fund (IMF), which were considerably reduced, particularly in the case of China. The IMF argued that “the combination of more transmissible variants and the strict zero-COVID-19 policy could continue to hamper economic activity and increase uncertainty. Larger disruptions could impact key commercial activities, including through port lockdowns,” according to an Oil Price report. Driving oil prices down further is the International Energy Agency’s (IEA) cut in its global oil demand forecast for 2022, also focusing on China’s COVID-19 measures as a significant factor.

However, this more recent study from JP Morgan claims that a ban on oil imports could drive Brent crude prices up by 65 percent, putting it at US$185 per barrel. Natasha Kaneva, Head of Global Commodities Strategy, JP Morgan, claimed in an interview with Bloomberg that a complete ban on Russian oil, which is an option that is currently being discussed by the EU as part of what will be its sixth package of sanctions against Russia for its invasion of Ukraine, would cut over 4MMb/d of Russian supply to the market, a volume that China and India would not be able to readily absorb regardless of price. However, the study does not claim that this ban is a likely option, as the EU remains split on the question of a full ban. More probable is a partial ban that would cut 2MMb/d of Russian supply, a number with a more moderate impact on the market. 

With the barrel at US$185, the economics of PEMEX’s business strategy might be reconsidered. The current move toward addressing national demand and consumption instead of increasing exports would have to be at least temporarily reversed to take advantage of such a windfall. However, the price hike is likely to end in the short term, although that assumption would be based on predicting Russia’s actions in Ukraine, which have proven to be rather unfixed.