Potentially, if things go wrong, the price of oil could surge higher, perhaps to the US$300 a barrel tipped earlier this year, or a crash back to $20/bbl if a threatened global recession kills economic growth.

 

Right now, it's very much a case of no one knows. Just cross your fingers and hope sanity prevails which really is a case of wishful thinking as sanity went out the window the day Russia drove its tanks down the highway to Kyiv. 

 

What happened to energy markets last week was a warm up for what's to come with the Brent oil price plunging from $96/bbl to $87/bbl (slightly lower than before the Ukraine invasion) before recovering to $89/bbl.

 

The latest choppy moves in oil sparked a mixed reaction among major producers with Russia once again warning that it could stop all oil exports, Europe repeating its plan to stop buying Russian oil by the end of the year, and OPEC saying it would cut output to keep the price high.

 

What that witches brew of threat and counter-threats tells The Slug is that anything could happen as the world battles competing forces which include ever-tightening official interest rates to tame inflation just as demand destruction from the $124/bbl oil price of earlier this year has its negative effect on economic demand.

 

Recent signals from the market which help paint a picture of impending chaos of the sort seen in early 2020 when the oil price fell to $20 (and negative for some futures contracts) include:

 

 

· The American Petroleum Institute reporting a surprise 3.6 million barrels build of oil reserves, the opposite of the 700,000bbl decline forecast by analysts.

 

· The European Union repeating its plan for a price cap on Russian oil.

 

· Russian president Vladimir Putin repeating his warning that if the EU tries its price cap, he will order the end of all energy exports.

 

· A slowdown in global trade reported by the World Trade Organisation, a significant indicator of recession in the months ahead.

 

· Frantic buying of Russian oil by the EU at a rate of one million barrels a day to build stockpiles before the end-of-year ban kicks in, and

 

· A suggestion in a draft EU document that includes using its legal powers to authorise the breaking of energy delivery contracts to ensure power availability in what promises to be a bleak winter for everyone in the northern hemisphere.

 

 

Meanwhile, in Australia, business sails on as the country with deep reservoirs of fossil fuels and a global leadership in new-energy metals trousers windfall profits as Europe looks south for energy supplies.

 

Woodside's deal last week with Germany's Uniper was an example of what might be to come with customers keener to do business with reliable suppliers than simply paying the lowest price.

 

While only for 12-LNG cargoes a year, and certain to be supplied from Woodside's US gas-trading business, the deal is a prime example of Europe's desperate need for energy.

 

Of the many recent developments, some of them conflicting, those which the Slug finds particularly significant are the stand off between Europe and Russia and the suggestion from the EU that energy contracts can be broken.

 

The European position, as an energy customer, is that it has the right to go on buying Russian oil until its tank farms are full, at which time it will walk away.

 

Russia's position is that if Europe attempts to impose a price cap, then it, as the supplier, has a right to rip up contracts, warning the EU that it would be "frozen like a wolf's tail" - alluding to fairy tail about a wolf being tricked by a fox into putting its tail in a hole on a frozen river.

 

The fact that the oil debate has reached the stage of using fairy tales to score a point is why the Slug reckons the price is poised to move quickly with the unknown being which way, up or down.

 

Putin's position is that Russia will disappear from the global energy market, effectively removing more than 20% of oil and gas from circulation - which would have a devastating effect on price, bringing back into focus the $300/bbl of March.

 

But if that happens then a threatened recession could be something far worse than a conventional downturn with stagnating global trade, a sign of disappearing demand - in which case the $20/bbl swings into view.

 

Without being too alarmist the measure which is the best guide to demand reduction and a lower oil price is one that few people in the oil and gas industry ever consider, the Baltic Dry Index.

 

The reason oil people don't look at the BDI is because it is a measure of demand for the bulk carriers which haul dry cargo around the world such as iron ore and coal.

 

Last year, before Putin started his war in Ukraine and before the US started raising interest rates, the BDI reached 5500 points. Last week it was quoted at 1150, a fall of 80% and a very real measure of how global trade is slowly taking oil demand with it.