Crude Rally Loses Steam as Price Moves Ahead of Fundamentals

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading higher at the mid-session on Wednesday, but well off their earlier highs. The price action suggests bullish speculators have driven prices way ahead of the fundamentals.

The markets surged earlier in the session as supply disruptions mounted after sanctions on Russian banks amid the intensifying fighting in Ukraine. Meanwhile, traders scrambled to seek alternative oil sources in an already tight market in an attempt to soothe the volatility.

At 15:46 GMT, April WTI crude oil is trading $107.98, up $4.57 or +4.42%. May Brent Crude oil is at $108.88, up $3.91 or +3.72%. The United States Oil Fund ETF (USO) is at $73.05, up $1.23 or +1.71%.

WTI and Brent crude oil jumped more than 5% earlier in the session, but the rally has since run out of steam as traders questioned valuation.

Ukraine Conflict Likely to Create Supply Deficit

The size and duration of the current rally is likely to be determined by how fast the market can replace the loss of Russian crude oil as well as refined oil products. Some believe a supply deficit will last for the duration of the armed conflict, but what does that really mean.

We have the current escalation of fighting between Russia and Ukraine, and if Russian follows through with its plan to occupy Ukraine, we will have the street fighting between Russian soldiers and Ukrainian citizens. So even if Russia wins the battles and takes over Ukraine, the actual fighting could take years.

Furthermore, I don’t think the United States and its allies are going to lift any of the sanctions imposed on Russia until the rogue nation leaves Ukraine.

US Sanctions on Russia’s Oil and Gas Industry Possible

Reuters is reporting Wednesday that the United States is “very open” to imposing sanctions on Russia’s oil and gas industry as it also weighs the potential market impact, the White House said as global oil prices touched eight-year highs and supply disruptions mounted.

In television interviews, White House spokeswoman Jen Psaki said while Washington was still considering hitting Moscow’s vast energy sector over Russia’s invasion of neighboring Ukraine, the impact on global oil markets and U.S. energy prices were a key factor.

Asked if Washington and its Western allies would slap energy sanctions on Russia, Psaki told MSNBC:  “We’re very open.”

“We’re considering it. It’s very much on the table, but we need to weigh what all of the impacts will be,” she added.

US Sanctions Already Priced into Market

The current stop and go price action suggests WTI and Brent speculators are already acting as if the United States has targeted Russian oil sales as part of its sweeping economic sanctions. So we have a potential “buy the rumor, sell the fact” situation developing.

But if the Biden administration is really concerned about high prices, supply disruptions and Russian imports over the long-run then it is going to have to find a way to increase U.S. supply and make the U.S. less-dependent on foreign and especially Russian crude oil.