By James Burgess for OilPrice.com
The US appears to be building pressure on Russia over its actions in Ukraine by releasing crude oil from its emergency stockpile onto the market, with news of a “test sale” causing oil prices to dip to their lowest levels in a month.
The US announced yesterday that it would hold the first test sale of crude from its strategic reserve since 1990, releasing 5 million barrels onto the market—just enough to send a message to Russia, whose economy depends on high oil prices.
US crude oil fell by more than 2% on Wednesday, its biggest drop in two months, on the news.
The White House said it did not associate the release with the crisis in Crimea, while the US Department of Energy claimed that it had been planning the strategic oil release for months. However, the timing of the release—as Ukraine faces a threat from Russia and as Russia takes control of Ukraine’s Crimea Peninsula—leaves traders unconvinced.
"The US is well supplied," Mark Routt, a senior energy consultant at KBC in Houston, told reporters. "In terms of crude stocks, there's little reason for [the sale] unless it was operational or for some other technical reason."
“The timing of this makes it seem like a warning shot across the bow towards the Russians,” Michael Wittner, head of global oil research at Société Générale in New York, told the Financial Times.
In an interview with Oilprice.com yesterday, Ukrainian former Vice Prime Minister Yuri Boyko noted that gas was the biggest weapon in Russia’s arsenal, but while Ukraine and other Central European governments are pleading for US natural gas exports to offset Russian gas, the DOE’s oil announcement yesterday came as a surprise.
If there is uncertainty over the impact of potential Western sanctions on Russia, what is clear is that lower oil prices can do a great deal of harm.
Much of the success of the Russian economy under Vladimir Putin over the past 13-14 years has been largely attributed to high oil and commodity prices, so if oil prices fall, Russia could be heavily exposed.
Oil prices are the Achilles heel of the Russian economy, according to Robert Bensh, an advisor to Mr. Boyko on Western capital markets and political systems.
Twelve years ago, the Russian federal budget balanced at $22 per barrel for oil. Today it is at $110 per barrel, said Bensh, who has been leading oil and gas companies in Ukraine for 13 years.
And if the US could get OPEC to help put further pressure on oil prices, the effect would be much more significant.
“Imagine a fall to $80 per barrel and the concomitant affect that would have on an already recessed Russian economy, its balance sheet and its markets. At $80 or lower, the Russian economy would head deeper into recession, the budget and current accounts would run significant deficits, capital flight would accelerate markedly, depleting FX reserves and putting hefty downside pressure on the [Russian] ruble.”
This article was originally published on OilPrice.com.