The main grade of oil that Russia exports into Europe is now being offered for sale at a hefty discount, signaling a sharp drop in demand, according to analysts at Independent Commodity Intelligence Services.

They calculated that a barrel of Urals crude is trading $10.60 below the price of benchmark Brent. That’s the biggest gap on record.

If traders continue to shun Russian oil, that could drive up prices around the world as competition heats up to secure barrels of crude from other sources.

Russia exports about 5 million barrels of crude per day. About half of that goes to Europe.

“We were already in a scenario where supply and demand were quite tightly matched,” said ICIS expert Richard Price. “There wasn’t much room in the system for disruptions.”

Western leaders know that sanctions on Russia risk further inflaming energy prices. They’ve made clear they want to punish Russian President Vladimir Putin without disrupting the country’s oil and gas exports, which they view as essential to keeping the global economic recovery from the pandemic on track.

“To be clear: Our sanctions are not designed to cause any disruption to the current flow of energy from Russia to the world,” White House economic adviser Daleep Singh told reporters on Thursday.

But oil traders are worried that calculus could change as Russian troops encircled Kyiv, Ukraine’s capital, on Friday.

“If you don’t know if [a] trade is going to be legal, you’re not going to take that risk,” said Henning Gloystein, director of the energy program at consultancy Eurasia Group.

Cargoes trading right now would typically be dispatched in early to mid-March, according to ICIS. Price emphasized that “a lot could change in that period of time.” Contracts due for delivery in a few months look even riskier.

Traders are already running into problems caused by this week’s invasion and the West’s response.

Some would-be buyers are having trouble securing letters of credit from Western banks, according to ICIS. Such letters are standard practice in the oil trade and provide assurances that payments for cargoes will be made. Russia’s biggest banks have been hit with new sanctions this week, and Western lenders are scrambling to figure out the impact on their business.

Additionally, vessel providers are increasingly hesitant to dispatch tankers toward the Black Sea as the conflict escalates. War risk insurance costs have gone up, and news that a Turkish-owned cargo ship was hit by a bomb off the coast of Ukraine’s Odessa on Thursday spooked operators.

“There is a real reluctance in the market now to send vessels anywhere near the danger zone,” said Richard Meade, the editor of Lloyd’s List, who has been monitoring vessel traffic.

If traders avoid Russian oil for a prolonged period, other producers will need to step up. The Organization of the Petroleum Exporting Countries, or OPEC, holds “a lot of the cards,” Price said. Nuclear negotiations between Iran and the United States could put more Iranian barrels on the market, but that wouldn’t ease the situation in the near term.

The consultancy Rystad Energy said Thursday that if the conflict drags on and causes long-term disruptions to supply, the price of oil could surge to around $130 per barrel.

“The reality is that significantly higher prices are on the horizon in Europe and overseas,” said Jarand Rystad, the firm’s CEO.

Invasion of Ukraine continues to roil markets

Russia’s invasion of Ukraine has injected major turbulence into financial markets as investors struggle to weigh the consequences of Putin’s aggression.

The latest: US stocks went on a wild ride on Thursday. Following a sharp drop at the opening bell, the S&P 500 and Nasdaq Composite recouped all their losses to finish higher. The Dow climbed back from earlier lows to end the day up slightly.

The picture remains murky. US stocks are struggling to find direction in premarket trading on Friday, but European shares — which sold off heavily during the previous session — are up sharply.

Russia’s benchmark MOEX Index, which plunged 33% on Thursday, rallied Friday. It was last up 19%.

The ruble also stabilized. Russia’s currency was last trading near 82 to the US dollar after plunging to almost 90 on Thursday.

That said: Investors aren’t brushing aside the conflict just yet. The CNN Business Fear & Greed Index, which tracks sentiment, has dropped into “extreme fear” territory.

But debate is brewing on Wall Street about whether the recent sell-off, which has also been fueled by concerns about inflation and the Federal Reserve’s next move, has been overdone.

“We don’t think this is a time to be outright negative on equities,” Mark Haefele, chief investment officer at UBS Global Wealth Management, told clients Thursday. “Sentiment is already poor, at least some of the risks have been priced in, and a combination of above-trend global growth and falling inflation could quickly make the picture look more favorable for investors.”

Up next

Cinemark (CNK) and Foot Locker (FL) report results before US markets open.

Also today: The latest reading of the Personal Consumption Expenditures Price Index, which the Federal Reserve uses to track inflation, arrives at 8:30 a.m. ET.

Coming next week: Wall Street’s attention will be hooked on developments in Ukraine.

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