Barclays cautions over chasing oil prices much higher

Investing.com - Crude prices have soared this week after U.S. President Donald Trump signaled a harder stance against Russia in a search for a ceasefire in Ukraine, but Barclays (LON:BARC) has cautioned against searching for too much upside.

President Trump has shortened the deadline for Russia to reach a potential ceasefire deal with Ukraine or face economic penalties. 

“Fifteen days into the initial 50-day deadline, Trump suggested yesterday he will give Russia just 10 more days to make an agreement, cutting the initial timeline in half,” said analysts at Barclays, in a note dated July 30.

At 08:15 ET (12:15 GMT), Brent futures gained 0.2% to $71.89 a barrel, and U.S. West Texas Intermediate crude futures rose 0.3% to $69.43 a barrel.

Both contracts had settled on Tuesday at their highest since June 20, having surged more than 3%.

“The episode reinforces our view … that geopolitical tensions have not gone away and continue to pose asymmetric upside risks to oil prices,” said Barclays. 

“President Trump’s patience with Russia seems to be wearing thin, and oil markets have reacted somewhat to the prospect of a potential supply disruption.”

A sanctions bill has been introduced in the Senate targeting Russian oil exports, with Senator Lindsey Graham calling it a ’Sledgehammer’ for the country’s economy, and it’s possible that Trump uses an executive order to a similar effect.

However, it is still not clear what specific policy measures will be announced against Russia, the bank said “and we will therefore not try to quantify the potential effect on balances at this time. Instead, we reiterate our view from late last year that a potential supply disruption due to elevated geopolitical tensions in Europe or the Middle East poses a binary outcome for oil markets.”

Having said that, “we would caution against assigning too high of a probability to a sustained material disruption in Russian supplies at this time, given several considerations that could blunt the effect,” Barclays said.

First, low energy prices are clearly a priority for the Trump administration.

Second, Russia has been able to work around Western sanctions since the invasion, as the country’s exports have been resilient to the G-7 price cap mechanism. 

Third, secondary tariffs on Russian oil could jeopardize ongoing trade negotiations with China and India, two key buyers of Russian oil. 

Last, secondary tariffs announced on buyers of Venezuelan oil in March have had a negligible effect on the country’s exports so far. So the potential ’Sledgehammer’ might not affect oil markets materially.