The global oil market is expected to remain volatile and expensive due to ongoing supply shortages.

• The potential oil shortages may cause oil prices to fluctuate significantly in the future.
• The volatility in oil prices can fluctuate greatly within a two-week period. One chief investment officer stated, "We experienced a significant change from $90 to $130 per barrel in a month, and we can expect this type of volatility to continue." Additionally, in just one week, we saw a decrease from $125 to $95, further emphasizing the unpredictable nature of oil prices.
• The price of oil increased by 7% on Monday due to the European Union's consideration of imposing sanctions on Russian oil and the attack on Saudi Arabian oil facilities by Houthi rebels.

The world is facing potential supply shortages, causing oil prices to race higher and experience more sharp spikes and sudden dips.

For consumers, the prolonged period of high gasoline prices, which remain above $4 per gallon, will result in more inflation. Additionally, businesses that rely on petroleum, such as airlines, truckers, chemical companies, and plastics producers, will face higher costs.

The invasion of Ukraine by Russia occurred when oil prices were already increasing due to tight supplies and rising demand from reopening economies. As a result, the loss of 5 million barrels a day of Russia's oil exports has further intensified the pressure on prices.

Helima Croft, head of global commodities strategy at RBC, stated that she remains constructive on oil because she believes there is no immediate solution to the war in Ukraine. Market participants have been giving Putin the benefit of the doubt on his willingness to negotiate, but Croft emphasized the importance of paying attention to his actions rather than his words.

On Monday, oil prices surged over 7% as the European Union mulled over joining the U.S. in an oil embargo following the weekend's attack on Saudi Aramco facilities by Iranian-aligned Houthi rebels in Yemen.

If Russia resolves its attack on Ukraine, there could be sudden collapses in the price, as acknowledged by analysts.

The range of outcomes in a two-week period can be quite diverse. Daniel Pickering, chief investment officer of Pickering Energy Partners, stated that they went from $90 to $130 per barrel in a month, and from $125 to $95 in a week, which is typical of the volatility they can expect. Pickering emphasized that a $10 weekly change is insignificant, and a 10% move has no impact.

Pickering said the market was back to trading fear Monday.

He stated that although it is not desirable to increase prices, the fear of actions related to Russian barrels is causing volatility. If this fear becomes a reality, it will lead to higher prices, and $130 will be put back into play if Russian barrels are canceled.

According to Pickering, between 2 million to 3 million barrels of waterborne Russian oil are not being sold daily due to the lack of immediate buyers. However, he stated that China and India are still purchasing Russian crude. He added, "I'm sure on the margins, there will be others willing to take more over time."

Pickering stated that he does not predict a return to $130 per barrel oil, but it could happen. Oil futures for April rose 7% to $112.12 per barrel on Monday.

Francisco Blanch, head of commodities and derivatives at Bank of America, stated that the U.S. market is positioned for recurring price fluctuations.

The U.S. Cushing storage facility in Oklahoma, which is a central oil facility for crude traded in U.S. futures contracts, is experiencing tight inventories due to limited production growth and strong refining and export demand. This lack of storage could lead to more volatility in the futures market, as the holder of a futures contract must take physical delivery when the contract expires.

In April 2020, the convergence of low demand and negative prices for WTI oil forced investors to liquidate their positions at negative prices. Now, the opposite could cause price spikes during expiration as investors try to buy.

The April contract will expire on Tuesday.

European ban?

The European Union is considering banning Russian crude, but there is disagreement among members. This week, EU governments and President Joe Biden are holding summits to discuss a stronger response to Russia's invasion.

According to Dan Yergin, vice chair of IHS Markit, the possibility of imposing either sanctions or an embargo on Russian oil in Europe is becoming increasingly likely, and the pressure will continue to mount in the coming week.

To minimize disruption, Yergin emphasized the need for careful consultation with the industry.

Europe's biggest export market for oil and natural gas is Russia, and Croft expressed skepticism about whether Europe will agree to a ban.

According to Croft, Germany will likely prevent any EU initiative to enforce energy sanctions, ensuring that Putin's economic support from oil and gas sales will continue.

The U.S. and its allies have imposed sanctions on Russia's financial system, and the U.S. has prohibited the import of Russian oil. According to Croft, additional sanctions may be announced in the future.

The military campaign's brutality will likely mean that sanctions will remain in place for the foreseeable future, and Russia will continue to be a toxic asset. However, Congress may impose secondary sanctions, which would force Germany to take action on the issue.

Supply shortages

Over the weekend, Saudi Arabia's oil facilities were attacked by Iranian-aligned Houthis, with missiles and drone attacks targeting a water-desalination plant, a liquified natural gas plant, a power station, and a gas facility. Despite the attacks, Aramco stated that there was no impact on supplies.

According to John Kilduff, a partner with Again Capital, the Saudis are utilizing the Houthi attack as a pretext to declare they are free of any oil market supply responsibility due to the attack. He added that Saudi's relationship with the U.S. has been tense during the Biden administration.

Kilduff stated that the Saudi refusal to increase supply is intensifying the pricing problem for consumers globally.

OPEC+, comprised of Saudi Arabia and other OPEC producers, as well as Russia, is a leading member of the organization. The group has agreed to return 400,000 barrels per day to the market until June. However, at its last meeting, OPEC+ did not indicate whether it would consider increasing production further.

The U.K. Prime Minister and the U.S. Secretary of State have visited Saudi Arabia in the past week, but the kingdom has not made any public statements regarding the invasion and has not announced any plans to increase oil production beyond its previous commitments.

Despite the stepped up Houthi attacks on energy infrastructure, Saudi Arabia is still determined to adhere to the OPEC+ easing formula, according to Croft. Boris Johnson returned to London without a deal, and the kingdom is now warning that it may not be able to sustain its current production levels.

According to Yergin, it would be challenging for Saudi Arabia to abandon its partnership with OPEC+, as it has been a source of stability for the market. Prior to the price collapse in 2014, the OPEC+ partnership was primarily a Saudi-Russian arrangement. Since then, Saudi Arabia's goal has been to bring Russia into an agreement rather than having Russia stand outside as a competitor. Their relationship has strengthened and they have become strategic partners.

The relationship between Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman was established at the highest levels.

According to Pickering, if OPEC does not increase production, the market will become tighter. However, he believes that OPEC does not feel highly motivated to do so in the near term, as there is a lot of strategic maneuvering happening. Pickering predicts that OPEC's production will continue to rise, but not at the pace that Europe and the U.S. desire.

Other supply sources

The U.S. has been exploring alternative sources of supply, including potential barrels from Venezuela, which has been subject to sanctions.

Recent developments have caused the negotiations with Iran to stall, preventing the market from receiving more than 1 million barrels of oil daily.

Producers in the U.S. have the potential to increase oil production, but their contribution is predicted to be minimal beyond the already anticipated 900,000 to 1 million additional barrels per day this year.

Some oil executives were meeting at the White House Monday.

Pickering stated that the industry is not highly motivated to act due to price fluctuations and the ongoing discussion of a windfall profit tax. He emphasized the need for the government to offer incentives, as they have already imposed penalties, but he believes that sticks alone will not be effective.

Antony Blinken is the U.S. Secretary of State.