Crude Oil Price Can Hit $380 Per Barrel if Russia is Forced to Cut Output Over G-7 Price Cap - Report

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Oil prices could shoot up astronomically if tensions caused by the Ukraine war persist, JP Morgan has warned. The bank's price prediction verges on the unseemly terrain but the analysts insist that if the West forces Russia into unrealistic output cuts, prices can rise as high as $380 per barrel.

JP Morgan says the "stratospheric" rise of oil price will happen in the wake of the US and European punishment for Russia over the Ukraine war.

Russian Retaliation

"The most obvious and likely risk with a price cap is that Russia might choose not to participate and instead retaliate by reducing exports ... It is likely that the government could retaliate by cutting output as a way to inflict pain on the West. The tightness of the global oil market is on Russia's side," the analysts wrote, according to Bloomberg.

crude oil storage tanks
crude oil storage tanks reuters

The comment came days after the Group of Seven (G7) meeting agreed in principle to enforce a mechanism to cap the price of Russian oil and gas output. Russia has challenged the western measure and the obvious result would be a slashing of crude and natural gas output by Moscow.

Russia is flush with cash at the moment despite the Ukraine war, and is in a fiscally stable position that allows it to reduce the output by millions of barrels per day without any real impact on its economy.

Nord Stream gas pipeline
Nord Stream gas pipeline Wikipedia

However, this will lead to a supply crunch around the world that cannot be easily addressed by other major oil producers. According to some projections, Russia can afford to slash production by about 5 million barrels per day.

Price Cap Plan to Fail?

The JPMorgan analysts predict that the world cannot deal with such an output drop. According to them, even a 3 million-barrel a day output reduction will result in the benchmark London crude rising to $190. The projections show that a reduction of 5 million barrels a day will result in crude prices hitting $380 per barrel.

The G7 leaders have proposed a price cap on Russian oil and gas after realizing that the wave of sanctions slapped on Moscow in the aftermath of the Ukraine war has more or less have only limited impact.

The G-7 plan is to force buyers of Russian oil and gas to offer very low prices for Russian crude and natural gas. The target is to offer a price just above production costs, so much so that Russia will not make the money it wants to run the war machine.

If Russia decides to retaliate by reducing oil or gas exports the plan will simply fail and instead, it will cause a price boom that the West can't deal with. "It is a nightmare scenario - both for Europe and Russia," analyst Tamas Varga told Reuters.

Russia has already suggested that in the event of such a move from the West, Moscow is prepared to revise its delivery contracts with Western countries that are critically dependent on Russian oil and gas.

This article was first published on July 2, 2022