The Organization of Petroleum Exporting Countries and other non-OPEC oil-exporting nations, a group known as OPEC+, met last week for the first time since Russian President Vladimir Putin ordered a full-scale invasion of Ukraine, and decided not to accelerate its oil output increase. The war has sent the price of oil soaring above $110 per barrel and has made both heating homes and driving cars more expensive in the West.

OPEC+ announced it would maintain its output increase at 400,000 barrels a day, issuing a statement that said the “current oil market fundamentals and the consensus on its outlook pointed to a well-balanced market.” It added that the current price volatility is not caused by changes in market fundamentals but rather current geopolitical developments, referring to the war in Ukraine without naming it directly.

The news comes a day after the 31 member countries of the International Energy Agency, including the U.S., the U.K., and most EU member states, agreed to release 60 million barrels of oil, scrambling to bring the price down.

It didn’t work.

Market shrugs as West hustles to bring oil prices down

This offering by the IEA, along with the snub by OPEC+, was immediately exposed by the market as a lackluster turn of events. The news triggered further gains in oil prices, with the price of international benchmark Brent crude rising by almost 10%. After OPEC+ announced it would keep its output the same, the Brent crude price settled at an eight-year high of $111 a barrel by 3 p.m. in London.

West Texas Intermediate, the U.S. oil benchmark, climbed to $109 a barrel, and oil substitutes like European natural gas prices also hit an all-time high. Dutch TTF gas futures rose more than 50% to €185 per megawatt-hour before scaling back to €159.

Meanwhile Russia’s oil benchmark Urals has dropped to its lowest level relative to Brent, with its differential, or the price difference between Urals and Brent, rising to Brent minus $18.60 a barrel.

Market participants are expressing fears surrounding Western sanctions siphoning Russia’s outsize role in global oil markets. Russia alone exports 5 million barrels of crude oil a day, representing around 12% of global trade and making it the world’s largest exporter. It’s the world’s third largest oil producer.

And with Russia’s capacity being traded at an alluring $18 a barrel discount to Brent, traders and oil companies seem to be struggling to keep their hands off.

Rejecting Russian oil

According to S&P Global, traders said there were no formal sanctions preventing the buying of Russian crude, but public perception of Western firms and a lack of credit stopped them from buying up the assets at an incredibly cheap price.

Amrita Sen of consultancy Energy Aspects told the FT that the market had been “underwhelmed” with the IEA reserve release and that traders had been expecting more output given the mammoth disruption to Russian energy exports.

While Western oil and gas companies have made strong announcements of pulling out of Russia, it seems buying up the country’s oil may still be in the cards while prices are cheap. Europe’s largest oil company, Shell, announced on Saturday it was exiting its interests in Russia, but reports by Bloomberg today indicate it is continuing to purchase the country’s oil and gas.

Separately, Spain’s largest natural gas company, Naturgy, is also reported to still be buying fuel from Russia.

The OPEC+ problem

The pandemic caused OPEC+ to dramatically cut oil output after an unprecedented fall in global demand for oil. It has since been steadily unwinding the cuts it instated in 2020.

The U.S. has been calling on OPEC+ to accelerate the output increase above the steady 400,000 barrel increase a day it has stuck to since August. However, only Saudi Arabia and the UAE have the capacity to do so, and this is unlikely as Saudi Arabia, the de facto OPEC+ leader, on Wednesday reaffirmed its commitment to an OPEC+ agreement with Russia.

In OPEC+’s last meeting, held in February when oil was nearing the $100 a barrel price, the group also chose to stick to its existing policy of moderate oil output at 400,000 barrels per day for March, leaving it with 2.6 million barrels per day of cuts to unwind by the end of September.

With little changes in oil supply, the only decline in oil prices will come from demand destruction, or the irreversible decline of demand for oil, an investor note from Goldman Sachs said.

The bank wrote that even higher prices, which would discourage or destroy demand, “is now likely the only sufficient rebalancing mechanism, with supply elasticity no longer relevant in the face of such a potential large and immediate supply shock.”