Ukraine issue poses a challenge to energy security
The impact of the Ukraine crisis can be seen in the market movements this week, as uncertainty has pushed prices to hover around $100 a barrel.
This reflects the challenges the world is faced with to maintain security and stability in energy markets. The situation has become precarious mainly due to Europe’s high dependence on oil and gas imports from Russia. The countries in the EU receive roughly 40 percent of their gas via Russian pipelines, several of which run through Ukraine.
Amid all the doom and gloom, two reports provided some relief to the markets, and prices reacted accordingly. First, the report that oil and gas infrastructure will not be targeted, and second, the possibility of the US releasing oil from its strategic petroleum reserves.
Russia, however, has said it will maintain uninterrupted flows of energy supplies, with Transneft expecting its crude exports to rise this year by 16 percent. Given Europe’s longstanding reliance on Russia as an energy supplier and limited logistical flexibility in rerouting Russian flows eastward, every effort is likely to be made to avoid disrupting energy trade flows.
Nevertheless, markets remain fragile and uncertain due to the ongoing developments and the reactions by the US and EU on sanctions.
Iran nuclear talks are also closely monitored, as any possible outcome will result in additional oil barrels on the market. A complete lifting of sanctions on Iran will lead to easing exports by 1.5 million barrels per day while marginal lifting should lead to the export of 0.5 million barrels per day. However, a marginal lifting of curbs is more likely.
Persistent geopolitical tensions and concerns about their potential impact on oil supply drove Brent crude to fresh seven-year highs amid high volatility. Meanwhile, investors remain optimistic about the global oil demand to continue its robust recovery this year, which added to bullish market sentiment. The West Texas Intermediate retreated slightly on the expectation that weekly data would show a rise in US crude stocks.
Therefore, the market prospects in the short-term price outlook appear relatively bullish, as European diesel margins are expected to increase, amid the possibility of disruptions to Russian gasoil imports to Europe.
The ongoing geopolitical tensions in Eastern Europe are expected to continue supporting oil prices in the short term, while any oil supply disruptions will add upward pressure to prices.
Mobility around the world is recovering amid easing COVID measures, and hence it would support oil product margins, specifically gasoline and diesel.
India’s oil demand is likely to be higher than expected in the second half of 2022 following the easing of coronavirus restrictions in several states, with mobility indicators already 8.4 percent above pre-pandemic levels, the highest so far.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.