Brent Crude bounces on deepening war situation
It looks like the celebrations of the oil bears were almost premature. In the previous week, the oil prices had fallen sharply from $139/bbl to $100/bbl in the Brent crude market. However, oil has taken support at $100/bbl and has now bounced back by more than 15% in the last 4 days to above $115/bbl.
The war between Russia and Ukraine is getting worse and the Mariupol experience shows that neither side is willing to relent and meet half way.
The big trigger for this bounce has been a slew of European Union countries pushing for more sanctions on Russia. However, Germany and Italy, two largest users of Russian gas, are sceptical about getting too aggressive as it compromises their long term energy security.
Russia has already warned that EU ban on oil imports from Russia would spike crude to around $200/bbl as EU absorbs 55% of Russian oil exports and 82% of Russian gas exports.
The reason markets are worried is that what appeared unlikely even 2 weeks ago, is now looking like a distinct possibility. Russia accounts for 8% of global oil supply and even if other oil producers chip in, it would still impact nearly 5-6% of global oil supply.
That is large enough to result in a surge in oil prices globally. Today, the EU is getting exasperated and want to play their trump card of a Russian oil ban to push for an early end to the war.
As of now, the US, Canada, Australia and UK are the countries to sanction Russian oil. Japan may follow soon and EU is still the X-factor. If EU joins in the Russian oil import ban, it could have a cataclysmic impact on oil prices and that is what the recent bounce in oil is factoring in.
The price of Brent Crude got perilously close to the 2008 high of $147/bbl, but has retreated since. However, the entire onus of future oil price moves lies on the EU decision.
While other oil producers are being pressured to enhance supply, it will not be easy to fill the Russia oil gap. OPEC and Saudi Arabia have already clarified that they cannot be held responsible for any drop in oil output caused by the Russia Ukraine war.
Saudi Arabia has been facing frequent attacks from neighbouring Yemen. The Houthi rebels based out of Yemen are hostile to Saudi Arabia and have been attacking Saudi Aramco oil installations.
Experts believe that good sense should prevail on the world sooner rather than later. Russia is already paying a huge cost in terms of selling discounted oil, weak rouble and loss of commodity exports.
The larger sanctions like withdrawal of Western oil investments in Russia and the spill-over effects of the SWIFT and bank related sanctions are going to hurt Russia badly in the coming weeks.
A clearer picture on oil prices will emerge once the stand of the EU and of Russia become clearer in the days to come.
Start Investing Now!
Open Free Demat Account in 5 mins