Oil futures prices are now anticipating a severe shortage of petroleum as sanctions imposed by the United States and the European Union disrupt exports of crude and refined products from Russia.
U.S. and EU policymakers last week insisted sanctions “will not target oil and gas flows” and sanctions regulations have included exemptions for financial transactions related to energy.
But sanctions have escalated rapidly and prices are spiking as traders, banks and shipping firms reduce their risks by over-complying and avoiding cargoes of Russian oil.
Brent futures prices for deliveries in May have climbed to more than $105 per barrel, up from $77 at the start of the year, as the market moves towards scarcity pricing.
More importantly, the six-month calendar spread has surged into a backwardation of more than $15 per barrel, consistent with an extreme shortage of oil in the short term.
The last time the calendar spread was in a backwardation this wide was in September and October 1990 after Iraq invaded Kuwait ().
In September 1990, the surge in spot prices and severe backwardation prompted the U.S. government to order a 5 million- barrel “test sale” of barrels from the Strategic Petroleum Reserve.
The test sale was small but signalled the government’s readiness to employ the reserve to ease fears about a shortage of oil and blunt the rise in prices.
At the time, senior officials insisted the test sale was not an emergency release but intended to familiarise the private sector with the process in the event an emergency sale became necessary.
In the event, less than 4 million barrels were sold, but the symbolic sale brought some short-term relief with both spot prices and the backwardation falling significantly (“History of SPR Releases”, U.S. Department of Energy).
In January 1991, coinciding with the onset of military operations to expel Iraqi forces from Kuwait, the United States and its partners in the International Energy Agency (IEA) ordered a larger drawdown of emergency oil stocks and other measures intended to make available an extra 2.5 million barrels per day.
The agency’s governing board noted that despite “ample availability of oil to the market, the outbreak of hostilities in the Gulf could lead to heightened uncertainty and volatility in the market.”
In response, the IEA adopted a “coordinated emergency response plan” involving a combination of a stock draw, demand restraint and other measures to boost availability by 2.5 million barrels per day (“History of the International Energy Agency”, Volume 3, pages 151-155).
This week’s surge in spot prices and Brent calendar spreads suggests something similar will now be required to calm the market and relieve the actual and prospective shortage of oil following Russia’s invasion of Ukraine.
John Kemp is a Reuters market analyst. The views expressed are his own.