Oil blasts through $110/bbl, as few alternatives seen to Russian supply

  • U.S. crude price highest since 2011, Brent since 2014
  • White House says U.S. open to Russian oil and gas sanctions
  • U.S. crude stockpiles fall unexpectedly last week -EIA
  • U.S. SPR stocks fall further to lowest since Aug 2002
  • OPEC+ sticks to incremental supply release

NEW YORK, March 2 (Reuters) - Oil surged relentlessly beyond $110 a barrel on Wednesday, extending its rally since Russia invaded Ukraine seven days ago, on expectations that the market will remain short of supply for months to comefollowing sanctions on Moscow and a flood of divestment from Russian oil assets by major companies.

The market rallied into the close of trading on heavy volume, with global benchmark Brent crude ending the day at its highest close since June 2014, while U.S. crude's settlement was its highest since May 2011.

The oil rally has been dramatic, with Brent gaining over 15% this week alone as the West responded to Moscow's invasion with numerous sanctions, which have targeted financial transactions and banks, designed to hammer Russia's economy.

While the energy sector was not specifically targeted, the sanctions have hampered exporting capabilities from Russia, whose oil exports account for about 8% of global supply, or 4 million to 5 million barrels per day, more than any nation other than Saudi Arabia.

"It increasingly looks like the market is pricing in a supply disruption to at least part of the nearly 4 million barrels per day of oil that is sold into the U.S. and EU," said Andrew Lipow, president of Lipow Oil Associates in Houston.

Brent crude futures peaked at $113.94 a barrel during the session, before settling at $112.93, up $7.96, or 7.6%.

U.S. West Texas Intermediate (WTI) crude futures hit a high of $112.51 a barrel, and closed $7.19, or 7%, higher at $110.60.

"Demand destruction - through still higher prices - is now likely the only sufficient rebalancing mechanism," said Goldman Sachs analyst in a note.

Relief in the form of more supply is unlikely in the near-term. The Organization of the Petroleum Exporting Countries and allies - which include Russia - stuck to their long-term plan to boost output by just 400,000 barrels per day at a brief meeting on Wednesday. read more

Even as the producer group, known as OPEC+, has increased output for the last several months, member states are routinely falling short of their targets, widening a gap that can only be filled by dipping into stockpiles.

Models of oil barrels and a pump jack are displayed in front of a rising stock graph and "$100" in this illustration taken February 24, 2022. REUTERS/Dado Ruvic/Illustration/Files

Current worldwide demand has roughly reached pre-pandemic levels, and there is inadequate supply, causing large countries to dip into their stockpiles to make up for the shortfall.

Refiners and other buyers of oil are scrambling. Prominent grades of crude oil traded worldwide, such as those in the North Sea and the Middle East, are at record premiums above Brent. read more

At the same time, the key Russian Urals grade is being discounted at $18 lower than the benchmark - and prospective sellers are still finding little interest in Russian oil. On Wednesday, Russia's Surgutneftegaz was unable to sell 880,000 tonnes of Urals oil from Russian ports, following cancellations of other proposed sales. read more

Adding fuel to the fire, the White House on Wednesday said it was "very open" to the possibility of targeting Russian oil-and-gas with sanctions. That could drive prices even higher, analysts said, until consumers start to balk at the rising costs. read more

The United States has attempted to thread the needle between actions that will hurt global oil markets and those aimed at Russia. On Wednesday, the U.S. imposed new export curbs on specific refining technologies, intended to hurt Russia's oil refining sector down the road. read more

Trade in Russian oil was already in disarray as producers postponed sales, importers rejected Russian ships and buyers worldwide searched elsewhere for crude as Western sanctions and pullouts by private companies squeezed Russia. read more

On Wednesday, merchant trader Trafigura said it had frozen its investments in Russia, a day after numerous global oil majors announced plans to divest of their Russian investments, including Exxon Mobil (XOM.N), BP and Shell (SHEL.L).

U.S. oil inventories continued to decline, meanwhile. The key Cushing, Oklahoma crude hub's tanks were at their lowest since 2018, while the U.S. strategic reserves dropped to a near 20-year low - and that was before another release announced by the White House on Tuesday in tandem with other industrialised nations.

That release of 60 million barrels of oil agreed by International Energy Agency member countries failed to reassure the market and prices extended their rally. read more

"Given the 100 million bpd oil demand market, 60 million barrels satiates slightly over half a day of demand...and barely gets the market past lunchtime," wrote RBC Capital Markets analyst Michael Tran.

Additioanl reporting by Sonali Paul in Melbourne and Muyu Xu in Beijing; Editing by Marguerita Choy and Kirsten Donovan

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David Gaffen has been with Reuters since 2009. As of 2023 he serves as the breaking news editor for companies news, overseeing breaking events around the largest North American companies. He also writes the Power Up energy newsletter that goes out to subscribers by email on Mondays and Thursdays. In 2015 he was nominated with a team of reporters for a Daniel Loeb award for the series "The Cannibalized Company" about share buybacks; he was part of a team that won a Reuters journalism award for energy coverage in 2021. David previously worked at The Wall Street Journal and TheStreet.com. Contact: 646-301-4216