Metals prices are all over the place, with rapid rises to record levels followed by sharp falls and considerable anxiety — anxiety that has also applied to surging oil prices. Agricultural commodities have likewise seen an unprecedented surge in prices since the war in Ukraine broke out. There is a risk of unrest in parts of the world where food prices have toppled governments in the past.
However, arguably the most important single commodity price point is oil.
Oil prices on the rise
Oil prices and, particularly in Europe, the natural gas price, impact energy costs. As such, oil prices can have a direct impact on national economies, if not the global economy.
A sustained high oil price could usher in a recession (quite possibly will in Europe). High prices drive demand destruction over the longer term. In the short term, consuming countries are encouraging alternative sources of supply to Russia, such as OPEC, to pump more oil, so far with little effect. The U.S., in particular, has been opening negotiations with previous pariah states like Venezuela to open up new sources of supply. So far, no special concessions have been offered to Iran in negotiations over a nuclear deal.
President Joe Biden’s executive order to ban Russian oil and distillates imports will have only a modest impact on Russia’s exports, nor on the US supplies, as the trade is a relatively low percentage of the total for both countries.
About 8% of the U.S.’s total imports of crude and fuel came from Russia in 2021. Crude will be easier to switch to Canada and elsewhere. However, distillates will be more challenging.
But while the decision may have a low impact on the U.S. it is having an outsize impact on global purchases of Russian oil. U.S. allies and companies are scrambling to switch supplies away from Russia. Russia will likely find a home for much of its output. Meanwhile, big buyers like China, India and those large trading houses that will not be able to resist making a quick buck will demand a steep discount for the pleasure.
Apart from China, which gets much of its Russian oil by pipeline, seaborne cargoes are being hit much harder by what the Financial Times calls a “buyers strike” as consumers fear reputational risk in handling Russian oil and worry that if they place orders they may not be able to take delivery or ship cargoes if the situation escalates.
Russia has threatened retaliation, saying it has every right to take a “mirror decision.” That means cutting off or restricting European supplies of natural gas and oil – a step that would be
What’s next for oil prices?
The greater the loss of Russian oil to the market, the higher the price will go.
This week, Brent and WTI crude prices surged but have since retraced. Yesterday, they traded around $116/barrel for Brent (May) and $112.60/barrel for WTI (April) as the market takes profits and pauses to see what comes next.
A complete ban on Russian oil could drive prices over $200 a barrel. However, such a ban is unlikely. Furthermore, it could not be sufficiently widely enforced to be effective.
Russia is not Iran. It has buyers and resellers who could move products by pipeline, if not by sea. But the aversion to Russian oil and distillate products is already having an impact on Russian refineries. As the demand mix changes and causes refinery changes, that chokes domestic crude demand.
Related: U.S. LNG Export Boost To Europe Scrutinized By Environmentalists
In the long term oil, companies are acutely aware a lengthy period of elevated prices will result in demand destruction. As such, rising oil prices will accelerate the move to alternative energy sources. Japan and Germany are both reviewing their decisions to close nuclear power plants. Regardless of the unreliability of supply, governments will encourage greater investment in renewable energy sources.
Have we seen oil’s peak?
Almost certainly not.
Sanctions — both official and a result of corporate decisions — are likely to be extended as the death toll increases and the rest of the world becomes increasingly angered by the indiscriminate destruction and deliberate loss of life. Current events are driving commodity prices. While we have a period of apparent market calm just now, that could — and probably will — all change as events unfold.
By Stuart Burns via AG Metal Miner
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But we aren’t in normal circumstance. Even without the added impact of the Ukraine conflict on prices, the global oil market was facing a shrinking global spare production capacity resulting from underinvestment, tighter market conditions and declining global oil inventories.
In such a situation, no matter how high oil prices rise there can never be a demand destruction since oil supplies could barely satisfy demand whilst a shift to renewables will take years and still won’t satisfy the market because of their intermittent nature.
Following the economic and banking sanctions against Russia concerns were raised in the global oil market that they may be followed by sanctions on Russian oil and gas exports.
However, no country in the world or even a group of countries can totally replace Russian oil exports of 8.0 million barrels a day (mbd) composed of 5.0 mbd of crude and 3.0 of refined products. Neither OPEC+ nor Venezuela, Iran and US shale oil could raise their production enough to replace Russia oil exports.
Short of a nuclear war, a settlement of the Ukraine conflict that satisfies Russian security demands will be reached. Moreover, Russia won’t withdraw its forces from Ukraine until all sanctions against it are lifted.
Once calm has returned to the global oil market, crude prices will return to the level of $94-$95 that Brent crude reached before the flare up of the conflict possibly even hitting $100 in the second half of this year.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London