Energy prices have been on a tear. WTI oil prices tested $90 per barrel before Russia invaded Ukraine. The impact of the war is widespread. Russia is one of the largest oil producers in the world. Their actions against Ukraine gave pause to their consumers, most of whom decided they were no longer willing to purchase Russian oil. Russia also exports gasoline and diesel fuel.

Russia exports 10.1 million barrels of crude oil and condensates per day. Most of those exports go to Europe. Additionally, Russia is one of the largest natural gas exporters globally. According to the U.S. Energy Information Administration, Russia exported nearly 9 trillion cubic feet of liquified natural gas. The war between Russia and Ukraine has thrown a monkey wrench into the global energy supply system, generating an interesting time to invest in oil prices.

How Much Oil and Condensate Does the World Consume?

The opportunity to invest in oil prices stems from the lack of supply rather than a rise in demand. Demand for energy products collapsed during the initial lockdowns, but as vaccines became available and people started driving and flying again, demand rebounded. Unfortunately, the supply of oil could not keep up with demand, which put upward pressure on prices. Global consumption of oil and condensates is approximately 99 million barrels per day.

While this demand and supply dynamic was occurring, Russia invaded Ukraine. NATO and its allies decided to place sanctions on Russia, which included rejecting purchases of Russian oil. According to the U.S. Department of Energy, approximately 100 million barrels a day are produced globally. Without Russian oil, 10% of the global supply would not be on the market. This situation presents a problem for countries that rely on Russian oil and natural gas. While many countries have entirely cut Russian oil out of their import quota, several countries in Europe cannot afford to make this commitment.

Price Action of Oil

After Russia rolled its tanks into Ukraine, WTI Oil prices, which is the North American benchmark, surged higher, hitting $130 per barrel before easing back down to $100. The surge in oil prices also buoyed gasoline prices driven by the price of oil. A refiner needs to purchase oil and refine it into gasoline in order to make gasoline. Prices at the pump surged to the highest average daily number in the United States at more than $4 per barrel. In areas of California, gasoline prices rose above $7 per gallon. In the United Kingdom, prices reached $10 per gallon. If you plan to invest in oil, you need to be aware that there could be significant volatility.

Government Action

The U.S. government did not want to sit on the sidelines and watch prices rise, especially ahead of the mid-term elections scheduled to take place in November 2022.

The Biden Administration announced on the penultimate day of March 2022 that it would release one million barrels of oil per day from its strategic reserves. The government’s goal is to flood the market and help reduce gasoline prices and fend off higher inflation. According to a fact sheet released by the Biden administration, the plan is to tap the nation’s strategic petroleum reserve for the next six months as domestic producers ramp up production. The issue, however, is getting domestic producers to increase their production. Production has remained stagnant as producers are afraid that if they start ramping up production as countries move to renewable energy, they will be left with a declining investment. While President Biden was telling the United States that he planned to release enough oil to put downward pressure on oil prices, he also wanted to incentivize companies to move toward renewable energy.

Investing In Oil Prices

Prices could reasonably stay elevated as there is more demand than supply. Saudi Arabia has not come to the rescue this time, and without Russian oil and natural gas on the market, prices will have difficulty easing. If the Russian Ukraine conflict does not end in a complete reversal of Russian aggression, Russian oil will remain off the market. Additionally, there is a need for U.S. producers to increase capital spending. They need to be convinced that an investment will not create a situation where they hold oil when the world moves to renewable energy over the short term. With WTI prices above $90 per barrel, oil producers are making windfall money, thus creating a notable time to enter the oil markets.