Amid geopolitical tensions, oil prices likely to seesaw
Crude prices rebounded on Friday as European countries decided against a ban on Russian oil imports over its invasion of Ukraine.
Markets are closely monitoring the geopolitical situation, which is causing prices of oil and other commodities to fluctuate. The US has already imposed a ban on imports of Russian energy, and the UK plans to phase out Russian oil by the end of the year.
On the other hand, following the Houthi terrorist attacks on Saudi Arabia’s oil facilities, the Kingdom categorically said it will not bear responsibility for any supply shortage.
Amid growing uncertainty, G7 leaders called on oil and gas producers to increase supplies to the international market. The International Energy Agency could also step in and release oil from the security stocks of the Organization of Economic Co-operation and Development to support the markets and prices.
While oil prices have been rallying, an end to the rally looks near as increasing signs of new trade routes for Russian oil to Asian markets are emerging.
The key question for the oil market is if Russian oil exports will fall and, if so, by how much and for how long. Some industry estimates show Russian oil loadings of crude and products went down about 1 million barrels per day from February and January 2022 levels. The industry expects major reductions in April on Russian loadings and discharges.
The oil market reacted aggressively to reports of an unexpected outage at the CPC terminal on the Russian Black Sea due to damage caused by a storm.
In addition, any further sign that the EU will move forward with banning Russian energy exports will also drive prices higher. The market faces uncertainty that could take the price in any direction. For now, the likely price direction is further up, but that probably will not last long.
Prices remained highly volatile over the reporting week amid an uncertain supply outlook. However, oil prices averaged near 8 percent higher as investors weighed the possibility of EU sanctions on Russian energy imports, leading to renewed supply worries. Concerns about supply disruptions in other regions added upward pressure. EIA data showing a decline in US crude stocks also had an impact.
After February meetings of financial institutions, it became obvious that monetary tightening will very likely accelerate in the coming months, cooling some of the inflationary pressure, but also the economic growth momentum.
As an outcome of the ongoing Russia-Ukraine conflict, it is increasingly likely that inflation will rise further and dampen global consumption and investment. Developing economies especially are expected to be affected by rising food prices toward mid-year.
Additionally, the market continues to struggle with comprehending the implications of Russian President Vladimir Putin’s statement on payments in rubles. Proposing that Russian gas should be paid in rubles, has raised issues that go beyond the energy sector. This may pose a challenge to the dominance of the euro and US dollar.
The market is keenly looking for direction from the meeting between the European Council and President Joe Biden. Bullish sentiment is being drawn from the prospect of the US imposing further sanctions on Russia and the EU still debating an oil embargo on Russia. However, the CPC outages could still lead to further gains in oil prices in the coming days. Government efforts to control the latest COVID-19 outbreak in China are expected to weigh on domestic gasoline markets in the immediate near term. Therefore, prices will remain well supported, subject to downward corrections with the expected changes in trade.
Since the Russian invasion of Ukraine, oil’s fundamental outlook has drastically changed for the near future and consequently so has the price and volatility. Russia exports 4.5 million barrels per day of oil to the West and the uncertainty around Russian oil supplies has created considerable volatility in the oil derivatives markets.
We also need to agree that the current market disruption is not only the result of the geopolitical uprising but also the reduction of investment in fossil fuels especially oil due to the hasty efforts toward energy transition. This has caused instability in markets and resulted in higher prices.
Moreover, the situation has reinforced the importance of oil-producing countries around the world and the key role they play in market stability, which needs to be recognized and appreciated.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.