Oil in wake of Ukraine crisis



March 12, 2022

Elsa Sc S describes the jitters caused by uncertain Oil in wake of Ukraine crisis

The Russian invasion of Oil in wake of the Ukraine crisis is fast becoming an economic war and this angle may ultimately prove to be the decisive one. It is reported that Russia has already suffered considerable financial resources that it may not be able to recoup owing to the ensuing economic sanctions and now the stage has come where the mainstay of Russian economic might, energy resources, is facing peril. In this context, a western embargo on Russian oil and gas is no longer unthinkable after the US secretary of state revealed that the idea was gaining traction in the Biden administration and had been the subject of very active discussion with allies. The reaction of this news proved electric with Brent crude oil hitting levels not seen since 2008, while gas soared to all-time highs as traders considered whether it could be thrown into the mix too.
More importantly the German pushback provided an additional impetus to attacking Russian energy resources as heavy German reliance on Russian oil and gas is not hidden from anyone. Meanwhile, consumers’ money is funding the war in Ukraine. EU oil purchases alone are putting $285 million a day into Russian pockets and this makes a ban rather unrealistic. Currently, the situation is that up to 40% of Europe’s gas comes from Russia and this is a crucial factor in winters months but as warmer days arrive and the immediate need for gas diminishes, it should be remembered that the picture is not all that different for crude oil and other petroleum products.
It is well-known that about 5 million barrels per day is pumped out of Russia, the world’s second largest exporter after Saudi Arabia and approximately half of it goes to the EU, which relies on Russia for 27% of its imports and about 15% of its total consumption. The UK is less dependent, importing 4.7 million tonnes of Russian oil in 2021 just under 100,000 barrels per day that was less than 10% of consumption. In this situation banning Russian energy is tough enough, involving a combination of increased production from elsewhere, reducing demand, buying more liquefied natural gas (LNG) and pushing harder on renewables and nuclear.
It is for this reason that throwing oil into the bargain only adds to the headache as a disruption on such a massive scale cannot be met by other producers, at least not for the foreseeable future. In this context one option under discussion is for the US to lift sanctions on Iran and Venezuela but raising production from these producers would take months for Iran, quarters for the US and years for Venezuela. Another route is to convince OPEC to loosen the taps. Only last week though, with the Ukraine invasion in full swing, OPEC stuck to a meagre 400,000 barrels per day increase.
Currently the Oil in wake of Ukraine crisis worry is about high the oil prices will go as the all-time high is $147.50, set in July 2008 and some analysts think it could go higher. It is opined that a prolonged war could take the price above that record, to $150 or more and if most of Russia’s oil exports were cut off, the resulting 5 million barrel per day shortfall could push prices as high as $200. A huge increase in the cost of everything from petrol to any goods transported by road is feared to bring in sky-high inflation and the cost-of-living crisis. But it is also predicted that if oil gets so expensive that people cannot afford it, they stop buying and the price comes down again. However, that most likely means measures such as industrial shutdowns, causing a significant downturn in economic activity and, very probably, recession.
Oil prices have already jumped to their highest levels since 2008 as Brent rose $5.1, or 4.3%, to settle at $123.21 a barrel and U.S. West Texas Intermediate (WTI) rose $3.72, or 3.2%, to settle at $119.40 a barrel. During the session, both benchmarks hit the highest since July 2008 with Brent hitting $139.13 a barrel and WTI $130.50. Global oil prices have spiked about 60% since the start of 2022, raising concerns about global economic growth and stagflation. Russia is the world’s top exporter of crude and oil products combined, with exports of around 7 million barrels per day or 7% of global supply.
Interestingly, Shell has snapped up a cargo of Russian crude at a bargain price, ending a self-imposed embargo on Russian oil by international energy industry. Shell bought 100,000 metric tons of Russia’s flagship Urals crude paying $28.50 a barrel below the price of international benchmark Brent crude, the widest discount on record. Shell bought the crude from Trafigura Group Pvt. Ltd., one of the biggest commodity traders and largest exporters of Russian oil as Trafigura had failed to sell the cargo before drawing a bid from Shell after dropping the price to a massive discount. Nevertheless, energy companies, trading houses, shipping companies and banks have all backed away from the Russian energy business. TW

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Elsa Sc S is doing her graduation from LUMS & a keen researcher


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