Oil extended gains after the close as a decision by the U.S. and other major economies to release emergency stockpiles failed to ease concerns of a major shortfall in supplies as sanctions mount on Russia. 

West Texas Intermediate futures in New York traded above US$106 after settling at US$103.41 a barrel on Tuesday. The International Energy Agency agreed to deploy 60 million barrels from stockpiles around the world, which amounts to less than six days of Russian output. Financial sanctions against Russia continue to mount, raising the specter of a major global supply disruption. 

The invasion of Ukraine has upended commodity markets from oil to natural gas and wheat, piling inflationary pressure on governments. Commodity prices soared the most since 2009, with the Bloomberg Commodity Spot Index, which tracks 23 futures contracts, climbing 4.1 per cent on Tuesday. 

“We are quite afraid that we are going to lose supply from Russia,” said Bart Melek, head of commodity strategy at TD Securities. “The release from strategic reserves does not seem to be enough.”

The rally was further strengthened by options positioning. As prices blew past key levels like US$100, where traders had amassed bullish positions, banks that sold those contracts found themselves exposed. As banks are forced to buy futures to cover their risk, the rally snowballs.

While the U.S. and Europe have so far stopped short of imposing sanctions directly on Russian commodities, the trade in those raw materials is seizing up as banks pull financing and shipping costs surge. Russia is the world’s third-biggest oil producer and, along with Saudi Arabia, an influential member of the OPEC+ alliance.

Wall Street banks including Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. have boosted their oil price forecasts, anticipating possible supply disruptions. Consultant OilX said the probability of heavy disruption of seaborne Russian crude and products is growing, which could push prices above US$150 a barrel. 

The industry-funded American Petroleum Institute reported on Tuesday that U.S. crude supplies decrease 6.1 million barrels last week, according to people familiar with the data. The data also showed stockpiles in Cushing, Oklahoma, the biggest storage hub in the U.S., declined by about 1 million barrels. The U.S. government will release its weekly inventory tally on Wednesday.

The turmoil sparked by the invasion will bring a new challenge in balancing a tightening market for OPEC+, which meets Wednesday to discuss output policy. Delegates said the cartel will probably stick to its plan of only gradually increasing supply. President Vladimir Putin spoke to the leader of the U.A.E. ahead of the meeting, while Saudi Arabia said it supports efforts to reduce escalation in Ukraine. 

Prices

• West Texas Intermediate for April delivery rose to US$106.34 at 4:50 p.m. in New York after settling at US$103.41 a barrel
• Brent for May settlement traded at US$107.43 a barrel after settling at US$104.97 a barrel

Indications of just how tight supply has been is showing in the market’s structure. Brent remains deep in backwardation, where prompt barrels command higher prices than later-dated cargoes. The benchmark’s prompt timespread was US$3.93 a barrel in backwardation after surging on Tuesday. 

Traders are paying the biggest premium in more than two years to bet on higher oil prices as Russia’s invasion of Ukraine extends crude’s relentless rally. The premium for Brent call options soared to over a two year high, underscoring the magnitude of bullish sentiment in the oil market.

Talks on the coordinated release are currently focused on tapping 30 million barrels from the U.S. Strategic Petroleum Reserve and an equivalent amount from a group of other countries, the people said. No decisions have been made and the discussions could continue for several more days, they said. Prior to the pandemic, global oil consumption was about 100 million barrels a day.

The invasion of Ukraine is also prompting oil companies to wind up their operations in Russia. Shell Plc and BP Plc have announced they will pull out, while TotalEnergies SE said Tuesday it will no longer invest in new projects in the country.

Related news:

• Russia’s President Vladimir Putin spoke to the United Arab Emirates’ de facto leader about Ukraine and the need for continued coordination over OPEC+, as oil prices surge.
• U.S. farmers and truckers are paying the highest price for diesel in nine years after oil soared above US$100 a barrel amid intensifying sanctions against Russia.
• Russia’s challenges getting its oil exported stretched into a sixth day as tanker companies continue to fret that their ships could get ensnared if Moscow were to be hit with fresh sanctions following the country’s invasion of Ukraine.