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USA | Jul 5, 2022

JPMorgan warns oil prices could surge 240%

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Likely result if Moscow retaliates against the G7 price cap and slash its oil production

Durrant Pate/Contributor

JPMorgan is warning oil prices could surge 240 per cent to US$380 a barrel if Russia dramatically slashes production in response to Western plans to cap the country’s energy prices.

G7 leaders last week announced they were working on plans to cap the price of Russian oil in an effort to keep up the pressure on Moscow over its invasion of Ukraine.

However, JPMorgan’s analysts, in a note this weekend, reminded stakeholders that Russia, one of the world’s key energy exporters, is in a relatively strong position thanks to the recent increase in oil and natural gas prices.

The financial services holding company reports that Moscow could retaliate against the G7 price cap and slash its oil production by as much as five million barrels per day without causing excessive damage to its economy. 

“Russia’s policymakers will likely address the challenge of the oil price cap from the position of strength. Russia had already showed its willingness to withhold supplies of natural gas to European Union countries that refused to meet payment demands.”

JPMorgan analysts

Markets Insider is reporting that such a cut would be disastrous for global oil markets, given the supply and demand mismatch that has already sent the Brent crude price up almost 50 per cent this year to around US$112 a barrel.

“The most extreme scenario of a five million barrel per day slash in production could drive oil prices to a stratospheric US$380 a barrel,” JPMorgan analysts, led by Natasha Kaneva, said in the note.

The estimate underlines the risks of tightening sanctions on Russia at a time when energy prices are soaring and causing major problems for Western politicians at home.

JPMorgan’s analysts say, “Russia’s policymakers will likely address the challenge of the oil price cap from the position of strength. Russia had already showed its willingness to withhold supplies of natural gas to European Union countries that refused to meet payment demands”.

Russia’s likely response to oil price cap

JPMorgan said the outlook was uncertain but a more likely outcome was that Russia cuts its output by three million barrels per day, which could push oil prices to US$190 a barrel. Production stood at just over 10 million barrels a day in May, according to Moscow financial newspaper Vedomosti.

The G7, which includes the US, UK and Germany, are exploring ways to cap Russian prices, including by prohibiting the buying or selling of Russian oil above a certain price. Reports have suggested they could use the UK and Europe’s power over global shipping insurance to help enforce any such cap.

JPMorgan indicated that an alternative outcome was that crude prices stabilised around current levels, with Russia rerouting its oil at lower prices towards Asia and other producers stepping up to fill any production gaps.

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