The shutdown of a significant pipeline in Russia that ships crude oil to refineries in Europe has sent ripples throughout the global oil markets.
With many worrying the this could lead to further tightening supplies; oil prices have jumped with short-term futures ending the day dollars above long-term contracts.
The Druzhba pipeline in question has had problems as far back as late April of last year when it was found that crude shipped in the pipeline had been contaminated with organic chlorides.
Immediately after this went public, prices for crude shot up as traders added a premium of $1 per barrel for immediate deliveries of oil in comparison to prices of crude to be delivered one month later.
As one of the world’s largest crude pipeline systems, the impact of this news was massive as the network carries Russian oil to refineries in Germany, Poland, Hungary, and the Czech Republic. Now that the pipeline has officially shut down, futures contracts for July delivery Brent ended at $72 per barrel on Tuesday, around $3.50 higher than the price of Brent crude contracts to be delivered in January 2020.
This phenomenon of where near-term oil prices are higher than later-dated prices, called backwardation, is seen by traders and investors as a sign that higher prices are coming in the future. The reason behind this is that traders are encouraged to sell oil right away and lock in the profits from this discrepancy rather than keep holding it.
“The Russian situation is the main driver for the [backwardation] in the Brent curve,” said Ryan Fitzmaurice, energy strategist at Rabobank. He goes on to add that a commodity market that’s seeing backwardation can draw in various hedge funds and groups looking to cash in a quick buck, pushing up prices further.
In a report released last week, Fitch Ratings went on to say that European refiners might see lower shipments as the Druzhba pipeline is cleaned. In the meantime, these refineries will likely switch to other sources of oil, such as seaborne crude, which is more expensive than closer, Russian oil.
As is the case when it comes to the financial markets, not all analysts agree that this backwardation is necessarily a bullish sign. For one, this price difference hasn’t occurred in West Texas Intermediate oil, the benchmark for U.S. crude. June delivery contracts were priced at $62.99 per barrel, while December’s stood at $62.49. However, it’s not surprising that the influence of the Russian pipeline on U.S. oil markets would be small.
Additionally, the U.S. Energy Information Administration said last week that domestic oil supplies stood at 472 million barrels, the highest seen in over two years, while production remains a near record high at around 12 million barrels of crude a day.
Besides this news from Russia, the growing tension between the U.S. and Iran have pushed oil prices upwards again. When news came out that oil tankers crossing the Persian Gulf had been attacked, the most likely culprit had been flagged as Iran. Recently, U.S. intelligence indicated exactly that, further elevating tensions in the region as the Persian Gulf has now become a danger zone for oil tankers transporting crude.