Panic as oil punches through $130 a barrel, nickel trading suspended on London Metal Exchange

US Brent crude oil traded above $130 a barrel (bbl) as the US administration announced a ban on the import of Russian oil and gas as punishment for its invasion of Ukraine nearly two weeks ago.

Economic planners are now confronting the unthinkable: what if oil prices spike to $200 or even $300/bbl?

The German Dax is down more than 21% since the beginning of 2022 and was in free fall on Monday, given Germany’s heavy reliance on Russian oil and gas. Germany is treading carefully, as any hostile move could result in Russia turning off the gas taps – something Russian military planners seem to have anticipated as a possibility.

On Monday, nickel trading was suspended on the London Metal Exchange after prices breached $100 000 a tonne “in the mother of all short squeezes”, writes Craig Erlam, market analyst at forex company Oanda.

“Further market turbulence in the commodity space could easily follow.”

US President Joe Biden said other countries may not be able to join the US ban, though the UK said it would phase out Russian oil and related products by the end of 2022, while the European Union expects to reduce reliance on Russian gas by two-thirds by the end of the year.

The fact that the US adopted a unilateral ban on Russian oil explains why oil prices are only 5% to 6% higher on Monday instead of 15% to 20%, says Erlam.

The current ‘melt up’ in oil prices may not last, as new production will be rushed to market. The US and International Energy Agency said it would release 60 million barrels of oil from emergency stockpiles, which is equivalent to 4% of member countries’ stockpiles.

Terence Hove, market analyst at Exness Africa, says Europe is far more vulnerable than the US to economic calamity arising from higher oil prices, and could possibly send their economies into a tailspin.

“Brent was trading at near $138 a barrel on Monday. These additional [US sanctions against Russia] further exacerbate the possibility of crude at or above $150 per barrel which will be felt with the SA consumer. This war has become everyone’s situation to bear, in one way or another.”

Brent crude oil price in USD

The US ban includes petroleum products, liquefied natural gas (LNG) and coal, as well as new US investments in Russia’s energy sector.

In 2021, the US imported just 3.3% of its crude oil from Russia, so the ban will have minimal impact on US supplies.

Opportunity for SA

SA Oil & Gas Association spokesperson Craig Morkel says there is an opportunity for SA to become energy-independent within a decade and create hundreds of thousands of jobs, provided we act with urgency. SA can also reduce become an oil price maker rather than taker.

“We need to fast-track the Upstream Petroleum Resources Development Bill, because that can determine a portion of production for local consumption which can then be priced locally and can wean ourselves off the international pricing market.”

Whatever Russia cannot sell to Europe, China will buy.

Several Russian banks cut off from the SWIFT global payments system have been able to switch to China’s UnionPay, a competitor to Visa and Mastercard.

UnionPay is in about 180 countries worldwide, which will allow Russian banking customers to purchase goods worldwide. China is also developing an alternative to SWIFT which it is expected to make available to Russia.

Rystad Energy’s senior analyst Kaushal Ramesh says there was a noticeable increase of about 4% in daily oil flows from Russia to Europe, offset by a small drop in flows from Norway.

“Russia has threatened to retaliate to Western sanctions by halting flows through Nord Stream 1, a risk that appears at least partly priced into the market at this point.

“Germany, on the other hand, remains reluctant to ban Russian energy exports, which the markets may read as a bearish signal.”

On the LNG front, Russian and non-Russian-linked vessels with Russian origin cargoes are able to be diverted to Belgium, France, and the Netherlands if turned away in the UK or Lithuania, suggesting these volumes may still enter the European gas network, says Ramesh.

“Near-term temperature forecasts have been revised upwards, and the outlook for wind generation has improved materially.”

The surge in oil prices has panicked financial markets.

The S&P 500 is down more than 12% since the start of the year, while the JSE Top 40 is flat over the same period.

This means per litre petrol charges of R20 and more will be here for the foreseeable future, but there is a broader impact on food and other prices – all of which rely on fuel for transport.

JSE Oil Gas and Coal index