Crude Trading Enters Bear Territory As Investors React to Iran, Russia

OPEC warns of diminished demand if the Russia/Ukraine invasion continues: File Image/Pixabay

China's zero tolerance Covid policy, combined with renewed hope that the Iran nuclear deal can be revived, led to more losses for crude on Tuesday, which also saw oil shedding over 20 percent over the past week and slipping into bear territory.

In what many analysts are describing as the most volatile market ever (and a blessing for motorists around the globe), West Texas Intermediate for April delivery fell $6.57 to settle at $6.44 per barrel.

Brent slid $6.99 to settle at $99.91 per barrel.

With crude now trading below the $100 threshold, Rebecca Babin, senior energy trader at CIBC Private Wealth Management, said, "This is a market that is trading on two strong emotions: hope and fear, [and] neither of those things are going to change supply/ demand imbalances."

Pessimism over the Iran talks turned to cautious optimism on Tuesday after Russia foreign minister Sergei Lavrov said that sanctions on his country won't affect the Iranian nuclear deal.

Lavrov may have been bolstered by the fact that despite the sanctions, Russia isn't cut off from other export partners: Surgutneftegas is reportedly offering financing flexibility to some customers in order to keep crude flowing, and India is developing a mechanism to facilitate trade using local currencies.

Still, Russia is heading towards a $150 billion default nightmare, according to Jonathan Prin, a portfolio manager at Greylock Capital Associates: he said, "In dollar terms, it will be the most impactful emerging-market default since Argentina's; in terms of broader market impact, it's probably the most broadly felt emerging-market default since Russia itself in 1998."

Swaps markets put a 70 percent chance on default happening this year, and Fitch Ratings said it's "imminent" – and when it comes, it is certain to affect crude trading to some degree globally, say investors. 

Meanwhile, the Organization of Petroleum Exporting Countries (OPEC) warned in its monthly report released Tuesday that Russia's invasion of Ukraine has "so far led to a number of issues, including rising commodity prices, which are further escalating global inflation…the effects of the conflict and especially the impact of rising inflation, if sustained, will lead to a decline in consumption and investments to varying degrees."

The report also supported the conviction held by Saudi Arabia that the cartel is producing enough to keep markets balanced: its members boosted output by 440,000 barrels per day (bpd) to 28.47 million bpd in February, bringing the yearly average so far to 28.25 million bpd, slightly above the average required this quarter.

As for Russia and Ukraine reaching a ceasefire, the message from the analytical community is: don't hold your breath.

A research note from Kpler stated, "Whilst reports of promising talks are to be welcomed, it is hard to see how either side at this stage would be prepared to make concessions that would be acceptable to any party.

"In this current situation, it is hard to see how crude oil prices are not being under-priced."

And with regards to China maintaining its zero tolerance lockdown policy even though most countries have opted to live with the virus, Louise Dickson, senior oil market analyst for Rystad Energy, worried about the economic damage this strategy entails: "It is estimated that a severe lockdown in China could put 0.5 million bpd of oil consumption at risk, which would be further compounded by fuel shortages due to inflated energy prices."