Oil prices increased as the Ukraine conflict is nowhere near resolution. Supply risks continue to drive the bullish trajectory of oil prices, as the potential for oil supply disruptions in the region remains high.
Brent crude futures traded 3% higher at $101/bbl and US WTI crude surged over 5% to above $96/bbl on Feb. 28, after the West imposed fresh sanctions on Russia, raising fears of supply disruptions from one of the world's largest oil and gas producers.
“Even with Russian and Ukrainian factions meeting at the border to discuss a military ceasefire, the fragile situation in Ukraine and financial and energy sanctions against Russia will keep the energy crisis stoked and oil well above $100/bbl in the near-term and even higher if the conflict escalates further,” said Louise Dickson, a senior oil market analyst at Rystad Energy.
Continued fighting in Ukraine itself puts Black Sea trade at risk, with 2 million b/d of Russia, Kazakhstan, and Azerbaijan oil passing through the Novorossiysk terminal, and any disruption would directly lead to a rise in risk premiums. Also at immediate risk is the transport of Russian oil via the Druzhba pipeline, which can carry 1 million b/d of exports to Europe.
“Unless there is a severe Russia-related supply disruption ahead of this Wednesday’s OPEC+ meeting, we do not yet expect Saudi Arabia, the UAE, and Iraq to lead the group and offer more supply to balance oil markets,” Dickson said.
Many of the OPEC+ barrels currently offline are of the medium sour blend and thus could be a good substitute for the medium-sour Russian Urals blend if either pipeline or seaborne exports are disrupted.
On the demand side, in the very short-term, war implies an uptick in oil consumption to fuel the jets and tanks, and on the civilian side, as people flee by personal vehicles. But over the long haul, a prolonged conflict in Ukraine and a drain on Russian resources would have a severe negative GDP impact, not only in these countries but also in neighboring FSU countries that depend on remittances from Russia.
“With the Russian ruble at record lows and growing inflation likely to spur higher interest rates from Russia’s Central, the risk of lower GDP in Russia is almost baked in at this point,” Dickson said.
