Oil prices topped $110 a barrel for the first time in years on Wednesday as Russia’s war in Ukraine started to scramble the world’s oil flows and OPEC decided to stick with its plan to boost output only slightly.
The jump in prices reflected an uncertain new order emerging among the world’s chief buyers and sellers of oil as long-held assumptions about how major players would respond in the event of a supply shock were being upended by rapidly shifting geopolitical views on Russia.
Russian supplies that had been expected to continue flowing to customers and evade major impacts from sanctions were snarled instead as some buyers refused to take the cargoes. Middle East producers that had responded to U.S. calls for more production in the past were walking a careful line on Russia, their new partner in the oil alliance known as OPEC+.
Meanwhile Western companies such as Exxon XOM 3.76% Mobil Corp., which had long produced oil with partners in Russia, were pulling out, raising questions about that output. And American shale companies, which had been viewed as swing producers that could quickly respond to market shortfalls just a few years ago, continued to indicate they were holding the line on added spending as signs emerged that their ability to ramp up might be bottlenecked.
Exxon Chief Executive Darren Woods said that existing sanctions directed toward Russia, as well as the possibility for reprisals to escalate, factored into the company’s decision to shut down its operations in the country and halt new investment there.
“We expect, with time, the ability to operate and sustain those operations will degrade,” Mr. Woods said Wednesday. “The market is pretty volatile right now.”
Prices of both Brent crude, the top global benchmark, and U.S. West Texas Intermediate surpassed $110 a barrel Wednesday, reaching the highest settlements since June 2014 and May 2011, respectively.
While some in Congress pressed the Biden administration to halt U.S. purchases of Russian oil, so far the biggest impact to Russian supplies has come from a self-imposed embargo by industry. Some refiners were refusing to take Russian oil and banks were refusing to finance shipments of Russian commodities, according to traders, oil executives and bankers.
Daniel Yergin, the vice chairman of S&P Global and author of the Pulitzer-prize winning oil history “The Prize,” said a continued disruption to the flow of Russian oil could lead to an energy crisis on a scale not seen since the 1970s Arab oil embargo.
“There’s a grave financial risk, there’s a reputational risk and there’s the operational risk, and all those things are there as people are backing away,” he said. “This is going to lead, as it did in the 1970s, to a mass scramble to rejigger logistics,” he added.
On Wednesday, the Organization of the Petroleum Exporting Countries and its allies including Russia said they would raise their combined production by another 400,000 barrels a day next month, sticking to a plan the group had agreed to last year as they sought to restore output to pre-pandemic levels. Several OPEC+ members have not met their existing targets to increase production, which had lifted prices as global demand picked up, even before the onset of war.
The decision indicated that Saudi Arabia and other Middle East producers were no longer aligned with an American push to increase production to bring prices under control, and came as many of the countries were staying neutral on the conflict in Ukraine or taking care to temper any criticism of Moscow.
The war in Ukraine has highlighted a long-simmering geopolitical shift that has seen Washington, after costly wars in Iraq, Afghanistan and Syria, redirect its focus and military resources to confronting China and away from the region where it has played an active role for decades. The prospect that Washington may no longer want as active a Middle East security role has left Saudi Arabia, the United Arab Emirates and other longtime U.S.-backed monarchies to look elsewhere for friends, leaving room for China and, most visibly, Russia to revive or establish closer ties with the oil-rich Persian Gulf.
“The Russians have raised their profile in the Middle East, as the U.S. has demonstrated that China is a much more urgent priority and now Europe is a much more important priority,” said Aaron Miller, a senior fellow at the Carnegie Endowment, a Washington think tank, and a former State Department official.
But as sanctions and fear of further punitive measures spooked global buyers, evidence that existing Russian sellers were struggling to unload supplies became clearer, threatening an already tight global market.
As of Wednesday, more than 3 million barrels of Russian crude that normally would leave the country each day weren’t doing so because demand had dried up, traders estimated, adding that they expect the number to keep rising. Before the war, Russia exported about 5 million barrels a day of crude oil and an extra 2.5 million of refined products such as gasoline and diesel.