What Will More Sanctions on Russia Mean for $100 Oil?

With Russia launching a full-scale invasion of Ukraine, oil popped over $100/bbl. The question now is: How far can it go?

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The situation is changing fast

Russia is the world's second-largest producer of oil and the world's largest producer of natural gas. The shortage of natural gas has been one of the main forces driving crude prices higher, as OPEC has repeatedly pointed out. High gas prices, particularly in Europe, have driven short-term demand for crude as a replacement fuel for energy producers.

Three gas pipelines go through Ukraine to Europe, transporting 86 billion cm a year, representing about half of Russia's gas supply to the Union. If the conflict escalates, it will likely become logistically impossible to keep those pipelines running, further increasing the demand for alternative fuels in Europe. Even if both sides don't move to shut down gas supplies, it's possible that it could still happen due to the fluid situation on the ground.

What happens next?

The scale of the invasion is likely to become clearer over the coming hours. Initial reports of Russian troops landing in Odessa, for example, were later denied by the Ukrainian military. We will get the Western response throughout the day, which the G7 is expected to meet Thursday in the European afternoon.

The West's trump card on Russia is the SWIFT payments network. Chancellor Scholz has said that cutting off Russian gas supply to Germany is an option but with already high fuel prices, it's unclear whether European politicians will do something that imposes even higher prices on voters. Being cut-off from international finance would be a big problem for Russia – but one that the country has been planning for. Western leaders may choose not to apply the total weight of sanctions to have a bargaining chip in negotiations.

On the other hand, uncertainty is likely to remain through the rest of the week and keep investors away from making risky trades, which might limit some of the immediate upside to oil to $100/bbl.

Brent at $100

Oil prices trade 35% above the 50-month long-term average right now and have registered more than 5% gains intraday alone. Now that bulls have made it past $100, the immediate risk is profit-taking and a false breakout.

Judging by the Fibonacci extension tool, WTI could top $112/bbl, then even $128. These are the 138.2% and 161.8% projection of the April 2020 price action. On the downside, bears could face major support at $90 and then the monthly open of $88/bbl just underneath.

Source: Spreadex trading platform

Key takeaways

Investors will be on their toes, biding time for Russia's reaction on the latest sanctions, whatever they might be. The US / NATO response against Russia's invasion will be equally important- any escalation will likely remove caps to upside price action.

If the scale of the invasion worsens, short-term speculators will likely take advantage of the intensification. Crude prices might top out if the US and G7 decide to shift to a softer approach to reduce the chance of retaliatory oil supply cuts from Russia, and/or avoid direct sanctions on oil.