Ukraine ripple effect: Why oil prices continue to rise

The oil price shock couldn’t have come at a worse time for the global economy, which was already reeling under high inflation. Brent crude, a global benchmark, was trading at around $114 a barrel on March 3, after hitting a 10-year high the day before. 

As Russian forces continue to bomb Ukrainian cities, concerns over the disruption of energy supplies to international markets are mounting. 

A JP Morgan analysis of the situation says crude oil could touch $185 a barrel by end of the year if Russia, the world’s third-largest oil producer, continues to face trouble shipping its cargoes. 

The United States, Canada, and the European Union member countries have slapped financial sanctions on Russian banks and companies. 

Even though the sanctions do not directly target Russian oil and gas infrastructure, they have spooked buyers.  

Around 66 percent of Russian oil is struggling to find takers as shipping companies and traders are afraid of getting caught in the sanctions trap. 

Buyers are so concerned that they are not willing to trade in Russian oil even when it’s offered at a steep discount, reports Bloomberg. 

This doesn't bode well for central bankers who have tried to tame high inflation in many developing and developed economies. High inflation has already become a global problem, according to the World Bank. 

A surge in oil prices will put pressure on the currencies of countries that depend on energy imports. 

At five million barrels per day (mb/d), Russia is the second-largest crude oil exporter, right behind Saudi Arabia. It also supplies around 2.8 mb/d of petroleum products, including gasoline, to the international markets.

As a share of the global market, Russia accounts for five percent of the oil supply. This might appear small, but in a tight market, every barrel of oil counts and any disruption can have a pronounced impact on the price of oil. 

Russian oil can find buyers in China and India—two large markets. But Moscow funds 36 percent of its national budget from energy sale proceeds, and a prolonged disruption could cause troubles to mount up for President Vladimir Putin. 

In the US and elsewhere, some politicians are calling for direct actions that can stop the flow of Russian oil and gas.

But such a move does not work in favour of either the United States or the EU as it will drive the price even higher and end up hurting their own populations. Inflation in the US is already at a 40-year high. 

The sanctions also aim to hurt the Russian oil industry in the long run. The US and EU have imposed a ban on the export of certain refining technology to Russia, which will face problems in producing refined products such as petrol if it’s not able to upgrade its refineries.  

A spillover effect 

The EU meets around 40 percent of its natural gas requirement via imports from Russia. So far, Gazprom, the Russian state-run oil and gas giant, has not scaled back the supply of gas, which is delivered to countries such as Poland and Germany via pipelines. 

That hasn’t stopped the natural gas price from spiralling through the roof. Spot prices at the Dutch Title Transfer Facility (TTF) hub, a European gas price benchmark, hit a record $221 per megawatt-hour on Thursday. 

Even though the US liquified natural gas (LNG) companies have increased supply to the EU market in recent months, it’s nowhere close to replacing Russian gas. 

Any reduction in supplies from Russia will benefit LNG exporters in the US, which has become the largest producer of natural gas on the back of newer drilling techniques that pump hydrocarbons out of hard-to-crack shale formations. 

Energy prices started to rise last year after a long slump as demand from factories and commercial businesses increased when pandemic-induced restrictions were lifted. 

Fear that the war could lead to shortages has led to a surge in prices of other commodities ranging from coal to wheat. 

As far as oil goes, there’s hope that a breakthrough in the Iran nuclear deal can help clear the way for a major oil producer to ship additional supplies to the market.