Geopolitical Risk Premium Could Send Oil Prices To $120

There are already plenty of oil bulls out there, but another one has just joined them. Strategist David Roche said this week oil could hit $120 per barrel in case of a Russian invasion in Ukraine.

The Ukraine situation has been in the spotlight for weeks now, and one might argue that if Russia wanted to invade, it would have done so already, supporting the argument with the fact that Russia stands to gain nothing but risk a lot with such a move. On the other hand, it is a fact there are Russian troops and military equipment near the border with Ukraine, and this is naturally making not just Ukraine but Western Europe and the United States nervous, with the counter-argument being that Moscow is biding its time before it strikes.

As a whole, the Ukraine situation has highlighted Europe’s dependence on Russian natural gas and its desperate attempts in the past couple of weeks to secure alternatives to this supply in case of a cutoff. But, like any major geopolitical event, an escalation in Ukraine would also affect oil prices.

“I think if there was an invasion of Ukraine and there were to be sanctions which impeded either Russia’s access to foreign exchange mechanisms, messaging systems and so on, or which prevented them from exporting their commodities, either oil or gas or coal, I think at that point in time you would most certainly see oil prices at $120 [a barrel],” Roche told CNBC this week.

The issue of sanction fallout, both for Europe and for the United States, has surfaced as a big potential problem: Russia is a major exporter to the European Union, but it is also a big exporter of crude oil to the United States, not to mention all big European and U.S. businesses that have Russian operations.

Yet while an invasion remains a potential development, there seem to be enough actual developments in the oil sector that could see prices top $100 per barrel. Supply remains tight, and traders remain worried about it even as the latest forecasts about U.S. production strike an upbeat note.

The Energy Information Administration, for instance, recently projected that U.S. crude oil production should rise to 12 million bpd this year and 12.6 million bpd—a record-high—in 2023. At the end of last year, HIS Markit’s Daniel Yergin forecast U.S. oil production could add 900,000 bpd a day this year. For context, according to the EIA’s latest weekly petroleum report, production averaged 11.6 million bpd last week.

Other non-OPEC producers could also see higher production this year, including Brazil and Canada, but the situation in OPEC itself is a little more complicated. Most of the cartel’s members are having trouble boosting production as much as their new quotas call for. This has become the main reason for bullish oil price forecasts, in fact, as it has combined with strong—stronger than the IEA expected—demand for the commodity.

Only a handful of OPEC members can afford to add more barrels to total output. For now, those select few are demonstrating a reluctance to do so. Pressure from consuming countries will continue rising, however, with the White House saying this week that “all options were on the table” with regard to trying to rein in prices, including talks with oil-producing countries.

“Nobody should hold back supply at the expense of the American consumer, particularly as the recovery from the pandemic continues and oil producers around the world have the capacity to produce at levels that match demand and reduce the high prices.”

Russia is one of the producers struggling to boost production, but forecasters are noting this may change later in the year. In the current supply context, handling the Ukraine situation without causing a global commodity-fueled economic crisis becomes even trickier.