Crude surges on geo-political risk

Fears that conflict between Russia and Ukraine could disrupt supplies has sent the price of oil rocketing.

Much of the financial market is moving under the sway of investor reaction to the Ukraine crisis and the price of crude oil is far from immune. The general reaction has, unsurprisingly, been a flight to quality, with capital being switched from riskier assets to those perceived as safer.

Normally in such a scenario we would, all other things being equal, expect some downward pressure on energy commodities such as oil, which are normally seen as being linked to risk appetite. Russia is the globe’s biggest exporter of energy, however, and speculation that any military conflict between Russia and Ukraine could see severe disruption in supplies has instigated a healthy risk premium in energy prices. According to the International Energy Agency (IEA), Russia’s oil output in 2013 averaged 10.9 million barrels a day.

By mid-afternoon in New York, crude oil futures for April were trading up 2% at $104.62.

The fundamentals for crude were already looking supportive before the Ukraine crisis, on account of dropping supplies at Cushing, Oklahoma, the price settlement point for US crude oil futures. The Keystone XL pipeline is now helping to move oil out of the Cushing hub to refineries in the US Gulf coast, a factor that has contributed to four successive weekly drops in oil inventories at Cushing, with a another drop expected when the EIA reports on Wednesday. 

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