Oil Rebounds on Russia-Ukraine Conflict As Tight Global Supplies Become Major Concern

However, China appears to be scaling back crude stockpiling: File Image/Pixabay

Oil prices on Tuesday rallied with West Texas Intermediate settling above $85 per barrel, on concerns that the Russia-Ukraine conflict could disrupt supplies at a time when global demand for crude is soaring.

Brent settled up $1.93 at $88.20 per barrel, while WTI rose $2.29, to settle at $85.60.

Helima Croft, global head of commodity strategy at RBC Capital Markets, speculated that the risk of a Russian invasion of Ukraine in the next few weeks is over 50 percent, and JPMorgan Chase & Co. earlier noted that any disruption to oil flows from the former Soviet Union could easily cause oil to skyrocket to over $120 per barrel – and exacerbate rising inflation.

Indeed, it was also reported on Tuesday that despite Russia's oil wells reaching their highest output in December since the Organization of the Petroleum Exporting Countries (OPEC) and its allies joined forces, analysts suspect Moscow over the next six months may only be able to deliver about half of its scheduled increases in crude production.

They added that by July, the nation's output may lag its quota by about 240,000 barrels per day (bpd).

Meanwhile in the U.S., inventories in key regions have tightened, in the case of delivery point Cushing, Oklahoma sliding to the lowest levels in over five years seasonally.

Ed Moya, senior market analyst for the Americas at Oanda, pointed out that in addition to Russia/Ukraine's potential to add to the supply problem, the risks "also include Iran nuclear talks and also North Korea."

Amrita Sen, founder and director of research at Energy Aspects, agreed, telling Bloomberg television on Tuesday that past geopolitical tensions weren't such a worry because there tended to be spare capacity or inventory, but this time out "the buffers are running really, really thin: demand's coming in far stronger than expected….and we're barely building going into a summer period where we always draw."

Sen said the United Arab Emirates being fired upon by Houthi forces was a cause for concern as that country along with Saudi Arabia provide the only real buffers to sustain the market over this period.

By contrast, Reuters on Tuesday wrote that China likely added about 170,000 bpd to strategic and commercial inventories last year, down sharply from 1.26 million bpd in 2020.

The news agency theorized that scaling back of stockpiling "means China's role as a major driver of crude oil demand growth may be waning, and imports are likely to become more aligned with its refinery processing rates."

This may have a global impact, as China has accounted for 44 percent of worldwide growth in oil demand since 2015.