Only demand destruction could stop oil from rising to $115 over the next month due to the difficulties Russia will have in payments for its energy exports after the West removed some Russian banks from SWIFT after Putin invaded Ukraine, Goldman Sachs says.
The removal of selected Russian banks from the SWIFT international payment system and the goal to limit the international operations of Russia’s central bank would affect Russian seaborne oil exports in the near term, Goldman said in a note to clients on Sunday.
“Commodity markets need to reflect not only these difficulties in paying for Russia’s exports but, with little left to sanction, the risk that Russian commodities eventually fall under Western restrictions,” Goldman’s strategists wrote in the note.
The investment bank raised its one-month forecast for Brent Crude to $115 per barrel, up from a previous projection of $95. And according to Goldman Sachs, the upside risk is significant due to potential further escalation of the war, sanctions, or longer disruption to Russian oil exports.
After a drop on Friday, oil prices shot up again on Monday to above $100 per barrel following this weekend’s further tightening of the sanctions against Russia over Putin’s war in Ukraine. On Monday, the Russian ruble crumbled to an all-time low against the U.S. dollar, the Moscow stock exchange did not open, the Russian central bank doubled the interest rate to 20 percent, and people in Russia queued at ATMs and banks to withdraw cash.
The sanctions effect on the Russian oil trade has started to show. Reports started to emerge that some Chinese banks have reportedly stopped financing deals involving Russian oil and companies.
Commenting on Goldman’s oil price view, Goldman Sachs Head of Commodities Research Jeff Currie told Bloomberg on Monday:
“I just want to emphasize that at this point right now: unattended consequent risk -- meaning a pipeline outage or something like that -- is extraordinarily high.”
By Tsvetana Paraskova for Oilprice.com
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A fair Brent crude price ranges from $100-$110. This is a good price for the global economy since it invigorates the three chunks that make up the economy, namely (i) global investments; (ii) the global oil industry and (iii) the economies of the oil-producing countries in the world combined.
If oil prices go above the tolerance level of the global economy, it will let us know in no uncertain terms. This happened twice in the recent past in 2008 when Brent crude hit $147 a barrel and in 2014 when Brent surged to $115.
Any price above the tolerance level of the global economy will lead to demand destruction forcing prices down to a level acceptable to the global economy and consumers.
If the financial sanctions on Russia by the United States and the European Union (EU) start to hurt the Russian economy badly, Russia may retaliate by halting all its gas and oil shipments to the EU and shift them to China and get paid either in dollars or in petro-yuan which is convertible to other currencies. But the EU economies will pay a very heavy price that will affect their economic growth.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London