The Week In Hindsight, 16 May 2014

Oil benchmarks extended their gains this week, driven higher at the open by the outcome of  last weekend’s separatist vote for secession in the east of Ukraine. Official estimates claim a 90% majority voted for Russian backed independence from the nation, which formed the basis for the last five days of gains.

Prices drew further support for their push higher from Russian threats to cut Ukraine’s gas supply, which led to growing fears of a disruption to European energy supplies. The contagion of concern was primarily due to the dependency of Europe upon Russia for energy, and takes into account the fact that a large portion of supply must be transported through Ukraine.

Although the dispute between Russia and Ukraine is predominantly focused upon gas, concerns have risen that it could spread to cover oil over the coming weeks which has been positive for prices. In addition to this, faster than expected draw downs of supplies in the US also boosted Brent and WTI during recent days.

This was as the IEA’s weekly energy report (International Energy Administration) showed that stockpiles at the Cushing depository in Oklahoma fell near to their minimum level of 20 million barrels. This has led to concern that a further fall would leave insufficient stocks to cover oil futures contracts traded on the New York Mercantile Exchange, which has again been positive for prices.

The IEA also delivered a message to OPEC in Thursday’s report. The US based organisation believes that the Organisation of Petroleum Exporting Countries will need to boost production in Q3 2014 by 900,000 barrels per day in order to meet upward revisions to projected global demand.

All in all, the outlook for oil continues to see prices biased toward the upside. This is given a positive growth outlook for developed markets, the need for emerging economies to increase strategic reserves and the ongoing threat of potential supply disruption across global conflict area hotspots such as Ukraine, Libya, Iraq and Africa.

Brent Crude / WTI overlay