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Standoff With Russia Over Ukraine Heads Into Most Tense Week Yet

Meanwhile, Cushing Inventory Levels Continue to Decline

Author: Brynne Kelly 2/13/2022

For months, the United States has been warning European allies that Russia may be preparing an invasion of Ukraine, amassing nearly 130,000 troops near the border and staging the largest joint military drills in years in neighboring Belarus. The United States has threatened Russia with crippling economic sanctions if it attacks, while the Kremlin has stated that NATO expanding further east or deploying weapons in Ukraine are red lines.

The growing crisis between Russia and Ukraine has put energy markets on high alert.

A potential disruption of Russian oil and gas exports to Europe could end in disaster.

Analysts estimate that oil prices could hit and exceed $100 in the case of conflict in Ukraine.

Russia's enormous military buildup near Ukraine features some of its most potent weapon systems and provides the Kremlin with the means to attack Ukrainian forces from multiple directions, which likely would overstretch their defenses. In its buildup, which has quickened in recent weeks, Russia has positioned forces on three sides of Ukraine: in Belarus, western Russia and Crimea and on naval vessels in the Black Sea. The forces include some of Russia's best trained battalions, special forces and surface-to-surface missiles that could strike targets throughout Ukraine. The more than 130,000 troops Russia has in the region are still too few to seize and occupy the entire country, according to US assessments. Urban warfare would still be a challenge, military specialists said, as it was for Russian forces fighting in Chechnya more than a decade ago and for the US and its partners in the Iraqi city of Mosul in their more recent struggle against Islamic State militants.

However, Russia's deployments provide its commanders formidable advantages. They include the capability to make rapid thrusts toward Ukraine's capital, seize swaths of territory, take command of the skies and blockade the country's ports, current and former US officials said.

For those trying to calculate the cost of Putin invading Europe, remember that war will crank up Russia's petroleum usage- and the US will almost surely sanction that country's use of the US dollar. Which is essentially the only currency you can use for petroleum transactions.

But, this isn't the only bullish factor underpinning oil prices. In fact, US markets are dealing with another potential crisis in the making as weekly EIA inventory reports continue to show a decline in US crude oil inventory held at Cushing, which reached their lowest levels for this time of year in over a decade last week (black line below).

As if tensions in Russia and low levels of inventory at Cushing weren't enough to put markets on edge, concerns about inflation are weighing on consumer sentiment in the United States, which fell to a new decade low in early February as attitudes toward personal finances deteriorated. The sentiment index at the University of Michigan fell to 61.7, the lowest since October 2011, from 67.2 in January. Consumers anticipate a 5% inflation rate over the next year, up from 4.9% last month and the highest since 2008.

There is a lot going on, but before we dive in to this week's market analysis, let's review some of the key news headlines last week that contributed to price action.

The Events That Shaped Last Week


On Tuesday, February 8 France’s President Macron’s said "I was able to receive assurances from Putin that the situation in Ukraine would not deteriorate further". This immediately sent WTI prices below the $90 level.


The EIA published its monthly forecast for US crude production on February 8, raising it by a chunky 165 KBD in 2022 vs the January release. With spot prices soaring, this is unlikely to be the last substantial upward revision

*EIA forecast that global oil inventories will begin rebuilding in March and continue throughout the year, which in turn will result in lower crude oil prices. It expects Brent prices to decrease to an average $75/bbl by 4Q22.

*Crude oil inventories at Cushing are now 21% lower than normal, based on the previous five-year (2017–2021) average for this time of year.

* Cushing storage tanks require a minimum level of oil to maintain normal operations, which traders estimate at 25 million barrels, according to a Bloomberg analysis.


Africa’s biggest oil producer faced fuel shortages after gasoline was delivered with too much methanol, which is regularly added to gasoline but in small amounts. Nigeria depends almost entirely on imports to meet its domestic gasoline needs. Nigerian fuel retailer MRS Oil Nigeria said on Wednesday gasoline it had received from Litasco, the Swiss trading arm of Russia’s Lukoil, had higher methanol level and was unusable


  • Cautions that an OPEC+ supply shortage might push oil prices higher because of the OPEC+ coalition’s “chronic” struggle to revive production.

  • OECD industry oil stocks declined by a steep 60 mb in December, led by large draws in middle distillates across all regions. At2 680 mb, oil inventories were 355 mb lower than a year ago. Preliminary data for January show OECD industry stocks falling by another 13.5 mb.

  • If the persistent gap between OPEC+ output and its target levels continues, supply tensions will rise, increasing the likelihood of more volatility and upward pressure on prices

  • Revises its historical demand baselines, finding 800k b/d of extra of oil consumption. The market is "incredible tight," says Toril Bosoni, head of the IEA report. OECD inventories super low. Still, IEA expects the global S/D to move into a surplus from 2Q


Last Friday Reuters reported that Russia and Ukraine said they had failed to reach any breakthrough in a day of talks with French and German officials aimed at ending an eight-year separatist conflict in eastern Ukraine.

Comments from Kremlin following Putin-Biden call on Saturday:

  • Talks were balanced, businesslike

  • United States' hysteria over Ukraine is at a peak.

  • The US security proposals don't touch on key issues.

  • Putin told Biden Ukraine Is sabotaging Minsk Accord

  • They agreed to maintain contact between sides.

  • The US spreads false information about Russia's plans.

In a briefing with reporters, Kremlin aide Yuri Ushakov described the call as business-like, but said it had taken place against a backdrop of "hysteria" in the West about a looming Russian invasion that he said was absurd. Ushakov said Biden had asked for the call to take place on Saturday as a result of the rising hysteria.

Kiev is not too happy, and is demanding proof from US intelligence backing the new dire allegations that Russia is poised to go in: "There has been too much information about a full-scale war with Russia – even specific dates have been announced. We understand there are risks. If you have any additional information regarding the 100 percent guaranteed invasion of Ukraine by Russia on 16 February, please give it to us," Volodymyr Zelensky told reporters on Saturday.


Before Russia-Ukraine tensions were all consuming, oil markets were already dealing with rapid declines in inventories in key locations, one of those being at Cushing. Typically, when inventory is being used to bridge the gap between supply and demand (i.e. too little supply), we see backwardation. Simply because in that scenario, a barrel in hand today is worth more than a barrel in the future. Once that gap is closed backwardation retreats as the value of having a 'barrel in hand' diminishes.

There are a couple of clear examples of this in 2014 and 2018. In both of those years, Cushing inventories were declining as they were being used to fill the gap between supply and demand (light blue shaded area below). At the same time, the front month futures spread moved into backwardation (black line below).

In both years, backwardation collapsed once barrels began to build at Cushing. It looks like a fairly comparable set up this year, with the front month futures spread in WTI approaching the highs seen back in 2014 and 2018 with a similar pattern in Cushing inventory draws. The current difference being that we also have the added risk of a Russian attack on Ukraine.

Historically, when inventories are declining or are below normal, prices tend to be supported and threats to supply cause stronger upside reactions. Once the trend reverses and inventories begin to build, spreads tend to collapse quickly.

The key question being asked now is whether or not Russian tensions are priced in given that WTI is now trading above $90. Yes, we have had a tremendous runup in price. But, as the above charts show, spread levels are similar to those seen in past years based on Cushing inventory levels/trends.

We see a similar pattern when comparing outright futures prices to Cushing inventory levels (below). This chart includes the infamous 2008 rally.

Much was written about the oil price rally of 2008. There was a lot of post-mortem analysis done as a result. In the Spring of 2009, an analysis was published by James Hamilton for the Brookings Papers on Economic Activity. In it he stated:

"Whereas previous oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007–08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been similar to those observed in earlier episodes, with significant effects on consumption spending and purchases of domestic automobiles in particular. Absent those declines, it is unlikely that the period 2007Q4–2008Q3 would have been characterized as one of recession for the United States. This episode should thus be added to the list of U.S. recessions to which oil prices appear to have made a material contribution."

To refresh your memory, here is what the shift in WTI futures curves looked like during that 2007 - 2008 time period.

Compare that to the shift in the WTI curve we have seen in the last 3 months:

One KEY difference to note is the term structure of the curves back in 2008 versus today. During the entire runup in prices that year, the curve was fairly flat. Meaning that the entire curve moved higher in tandem. Even at peak prices (7/22/2008 line above), the front of the curve was in contango. That is a stark contrast to the shape of today's curves. This is notable given the buying we have seen in the back of the oil curves with calendar 2024 settling above $73 last Friday.

That brings us back to Cushing. The market is looking to detect a trend in inventory builds to justify a selloff in calendar spreads. They want an incentive to store barrels or commit to production. That doesn't necessarily mean that outright prices have to fall as well. It could also happen over time with the back of the curve rising faster than the front until it looks similar to the 2008 curve structure. Food for thought....

Bottom Line

As noted in our title the 'Standoff With Russia Over Ukraine Heads Into Most Tense Week Yet'. Headlines exacerbate volatility in tight markets. But, this isn't the only reason oil prices are higher. There is a strong link between declining inventory trends at Cushing and calendar spreads. Current levels are similar to those seen in 2014 and 2018.

Of Note Over the Weekend

Comments from US Secretary of State Blinken:

  • The United States discussed Russia and Ukraine, with Japan and South Korea.

  • The US has no hostile intentions toward North Korea.

  • The United States remains open to discussion with North Korea.

  • The United States, Japan, and South Korea will closely collaborate on the Korean Peninsula.

  • It is obvious that North Korea is in a period of provocation.

  • The US is ready to meet North Korea without preconditions.

  • US isn't ruling out further North Korean provocations.

  • The US, Japan, and South Korea emphasized peace in the Taiwan Strait.

The United States is evacuating almost all of the staff from its embassy in Kyiv as Western intelligence officials warn that a Russian invasion of Ukraine is increasingly imminent. A senior State Department official said Saturday that a very limited number of staff will stay to keep communications open with the government but all consular operations will be suspended.


EIA Inventory Recap

Weekly Changes

The EIA reported a total petroleum inventory DRAW of 8.70 for the week ending February 4, 2022 (vs a net DRAW of 3.30 last week). However, inventories at Cushing continue to draw.

YTD Changes

YTD total petroleum EIA inventory changes show a BUILD of 8.00 through the week ending February 4, 2022 (vs a net BUILD of 16.70 last week).

Inventory Levels

Commercial Inventory levels of Crude Oil (ex-SPR) compared to prior years are have gone from way above historical levels to surprisingly below historical levels and should continue to draw as long as backwardation in the market persists.


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