Oil prices surge to $110 a barrel amid Russia-Ukraine crisis

Oil prices are surging again as Russia continues its assault on Ukraine, pushing crude up to $110 a barrel. Higher energy prices could worsen the inflation that’s already threatening economies worldwide and prompting concern among central banks.

The International Energy Agency’s 31 member countries have agreed to release 60 million barrels of oil from their strategic reserves — half of that from the United States — “to send a strong message to oil markets” that supplies won’t fall short after the Russian invasion of Ukraine.

The board of the Paris-based IEA made the decision at an extraordinary meeting of energy ministers chaired by US Energy Secretary Jennifer Granholm.

She said in a statement that US President Joe Biden approved a commitment of 30 million barrels and that the US is ready to “take additional measures” if needed.

The group’s “decision reflects our common commitment to address significant market and supply disruptions related to President Putin’s war on Ukraine,” Granholm said.

Russia plays an outsized role in global energy markets as the third-largest oil producer.

Its exports of 5 million barrels of crude per day amount to about 12% of the global oil trade. Some 60% goes to Europe and another 20% to China.

US Federal Reserve Chair Jerome Powell told Congress in testimony Wednesday morning that the Fed was ready to begin a cycle of interest rate increases this month in an effort to fight back inflation.

Powell cautioned that the financial consequences of Russia’s invasion of Ukraine were “highly uncertain” and that the Fed will “need to be nimble” in responding to unexpected changes resulting from the war or the sanctions that the United States and Europe have imposed in response.

Markets shaken

So far, US and European sanctions have not barred oil or gas exports and have included exceptions for transactions to pay for oil and gas. Western leaders are reluctant to restrict Russian oil exports at a time when global energy markets are tight and high prices are fueling inflation in developed economies.

But the invasion has still shaken markets worldwide.

On Wall Street, the futures for the benchmark S&P 500 index rose 0.2% while the same for the Dow Jones Industrial Average climbed about 0.3%.

Markets in Shanghai and Tokyo declined as Russian President Vladimir Putin’s invasion fed fears of global economic turmoil. Stocks turned higher in Paris and London.

The war is adding to worries about global economic growth as the Federal Reserve and other central banks gear up to fight surging inflation by raising interest rates.

“The conspiracy of geopolitical uncertainty and stagflation-type impulses is a brutal shock,” Tan Boon Heng of Mizuho Bank said in a report.

The DAX in Frankfurt fell 0.4% and the CAC 40 in Paris gained 0.2%. The FTSE 100 in London added 0.4%.

Russia’s central bank decided that stock trading on the Moscow exchange would remain closed Wednesday for a third day, though trading of currencies and precious metals resumed for the first time this week.

The value of Russia’s ruble fell further to less than 0.9 US cents despite its central bank’s decision Monday to raise interest rates to defend the currency.

Oil prices rose despite an agreement by the United States and other major governments in the International Energy Agency to release 60 million barrels from strategic reserves to stabilise supply.

Benchmark US crude jumped another $7.75 to $111.16 per barrel in electronic trading on the New York Mercantile Exchange after earlier rising as high as $111.50.

Brent crude, the international price standard, gained $7.77 to $112.74 per barrel in London. It soared $7 the previous session to $104.97.

“Markets dismissed the notion that 60 million barrels of strategic reserves released will be consequential to the risks of Russian supply jeopardized,” said Tan of Mizuho. “Russia pumps more than that in just six days.”

Impact on markets

Late on Tuesday, President Joe Biden said he would try to cushion Americans against the impact of higher oil prices. “I will use every tool at our disposal to protect American businesses and consumers,” Biden said.

On Wall Street, the Dow Jones Industrial Average lost 1.8%. The Nasdaq composite slid 1.6%.

In Asia, the Nikkei 225 in Tokyo lost 1.7% to 26,393.03 and the Shanghai Composite Index shed 0.1% to 3,484.19. India’s Sensex gave up 2.1%.

The Hang Seng in Hong Kong sank 1.9% to 22,334.14. In Seoul, the Kospi gained 0.5% to 2,712.97.

Sydney’s S&P-ASX 200 added 0.3% to 7,116.70 after government data showed Australia’s economy grew by 3.4% in the final three months of 2021 over the previous quarter and consumer spending was strong.

Economists say Asian economies are less exposed to the war than Europe but those that need imported oil will be hit by rising global prices, adding to inflationary pressures and depressing business and consumer activity.

Moscow’s attack on Ukraine and Russian threats of retaliation in response to Western sanctions also have roiled global markets for wheat and other commodities.

Prices of wheat, of which both Russia and Ukraine are important exporters, have risen more than 20% over one month ago.

Investors shifted money into the safe haven of government bonds, pushing up their market price and narrowing the yield, or the difference between the current price and the payout at maturity.

The dollar gained to 115.39 yen from Tuesday’s 114.86 yen. The euro declined to $1.1094 from $1.1123.

Demand for oil

Last month, the IEA said global demand for oil was 100.2 million barrels a day in the fourth quarter of 2021. Demand is expected to grow to an average of 100.6 million barrels a day this year, as restrictions to limit the spread of COVID-19 are eased, the IEA said.

Besides the United States, other members of the organization include Germany, France, the United Kingdom, Japan and Canada. IEA members hold emergency stockpiles of 1.5 billion barrels of oil. The release amounts to 4% of stockpiles, or roughly 2 million barrels per day for 30 days.

It’s only the fourth time in history that the IEA has done a coordinated drawdown since the reserves were established in the wake of the Arab oil embargo in 1974.

From the US perspective, the price of crude oil determines a big portion of what drivers pay to fill up their cars with gasoline. The national average for a gallon of gas is $3.61, which is 26 cents more than a month ago and 90 cents more than a year ago, according to motor club federation AAA.

In 2021, the US imported roughly 245 million barrels of crude oil and petroleum products from Russia — a one-year increase of 24% over 2020.

Nearly 8% of US imports of crude oil and petroleum products that year came from Russia, based on data from the statistical arm of the US Energy Department.