Global commodity markets have surged to multi-year highs, with oil prices topping $130 per barrel, while natural gas, aluminium and wheat have all hit fresh record highs since Russia’s invasion of Ukraine and the subsequent sanctions that have been imposed on Russia as a result. An extended period of geopolitical tension and elevated risk premiums across all underlying commodities is now expected, with far reaching implications across global commodity markets. The unfolding conflict has vast implications and J.P. Morgan Research has revised commodity price forecasts up 10-20% across the sector. Russia's impact on the global energy balance is meaningful, with even the U.S., a major gas and oil producer, importing Russian crude and Liquid Natural Gas (LNG) cargoes to meet its consumption needs. In this report, J.P. Morgan looks at how geopolitical tensions could impact oil and gas prices in the months ahead.

While the U.S. and its allies have so far stopped short of imposing penalties directly on Russian oil and gas, it has become increasingly clear that Russian oil is being ostracized. The preliminary Russian crude oil loadings for March revealed a 1 mbd drop in the loadings from the Black Sea ports, 1 mbd drop from the Baltics and 0.5 mbd drop in the Far East. In addition, there is an estimated 2.5 mbd loss in oil products loadings from the Black Sea, for a total loss of 4.5 mbd.

Up until recerntly, Russia was exporting about 6.5 mbd of oil and oil products, with two-thirds clearing through the now-frozen seaborne market. Out of that, Europe and the U.S. accounted for 4.3 mbd, with Asia and Belarus rounding to 2.2 mbd. As the invasion persists, almost 70% of Russian oil is struggling to find buyers. So far, Russia is not withholding volumes. However, Russian producers are facing difficulties selling their oil, with Russian benchmark Urals oil being offered at a record $20 discount to international benchmark, with no bids.

“So large is the immediate supply shock that we believe prices need to increase to $120/bbl and stay there for months to incentivize demand destruction, assuming no immediate Iranian volumes,” said Natasha Kaneva, Head of Global Commodities Strategy at J.P. Morgan.

This could result in a 1.2 mbd hit to this year’s demand, bringing 2022 oil consumption 550 kbd below 2019 levels. If disruption to Russian volumes were to last throughout the year, the Brent oil price could exit the year at $185/bbl, likely leading to a massive 3 mbd drop in the global oil demand. Key to this significant upside is the assumption that even if shale production responds to the price signal, it cannot grow by more than 1.4 mbd this year, given labor and infrastructure constraints.

The Iranian deal could immediately increase supply by 1 mbd over the next two months through the release of floating storage. As Iran ramps up production from the current 2.5 mbd, another 0.8 mbd could be added throughout the second half of the year. Another potential supply response could come from the Organization of the Petroleum Exporting Countries and their allies (OPEC+). The alliance has the capacity to quickly release 1.5 mbd of supply but so far, there is no indication that the group will alter its current plan to increase output in 400 kbd increments. Finally, the third option is the Strategic Petroleum Reserve (SPR) release. The International Energy Agency (IEA) agreed to release 60 million barrels from its members’ strategic reserves, worth barely two weeks of lost Russian supply.

Reflecting the higher risk premium across the oil market and wider commodities complex, the J.P. Morgan baseline view calls for the Brent oil price to average $110 /bbl in the second quarter of 2022, $100/bbl in 3Q22 and $90/bbl in 4Q22, with the possibility that prices rise as high as $120/bbl in the interim, depending on the state of geopolitics. This represents an 11% increase on J.P. Morgan’s November forecast.

If the market begins to price a probability that Russia may take retaliatory measures by reducing its energy exports, a four-month disruption of 2.9 million barrels per day (mbd) of Russian export volumes to Europe and the U.S., will likely see the Brent oil price averaging $115/bbl in 2Q22, $105/bbl in 3Q22 and $95/bbl by 4Q22.