| Meital Bar David, Senior Energy Analyst, Mizrahi Tefahot Bank
Fears of war and a confrontation between blocs the like of which the continent of Europe has not experienced since the end of the “Cold War” and the fall of the Berlin Walls, raised the level of anxiety of investors and traders during trading in the financial markets last Friday.
US President Joe Biden’s statement that, as far as he knows, Russian President Vladimir Putin has already given the Red Army an operation order to occupy Ukraine, despite feverish diplomatic efforts, and his order to evacuate most of the diplomatic staff from the US embassy in Kiev, signaled: They have been galloping forward in recent weeks, leaping even further and reaching a price of just over $ 95 a barrel, the highest prices since 2014.
In my opinion, the recent sharp rises are an outgrowth of the fear that a Russian invasion of Ukrainian territory will lead to the imposition of severe economic sanctions on the former. Thus, according to reports, Biden made it clear to Putin in their lengthy conversation over the weekend.
I believe that this escalation is now devouring all the cards – and the other factors, which routinely affect the oil market and its prices, are now playing a second fiddle. For example, the subject of trade in the economy and the largest crude oil producer in the world, the United States. In the last week, a relatively sharp decline of about 5 million barrels was reported in this inventory. The decline surprised experts, who thought that inventory would increase.
In my opinion, despite the depletion of inventory, this will not fundamentally change the curves of supply and demand in the global oil market, and as mentioned, the question of the Russian invasion and the response of the Western powers will affect much more in the near future.
Why actually? Russia is the second largest oil producer in a group called OPEC + (cartel companies and allies) and has observer status in the organization. If Russia is boycotted, following its possible invasion of Ukraine, which is interested in the NATO alliance, in a way that will not allow it to export the crude oil and natural gas it produces, it means an immediate and substantial shortage, which is estimated to reach millions of barrels daily.
Against the background of the already rising prices of these two important inputs, a shortage of this magnitude will further jump prices, cause damage to economic activity and further inflame global inflation.
All sides have something to lose, and first and foremost European countries, which are facing double-digit increases in the prices of natural gas that Russia supplies them.
An overall war scenario certainly meets the definition of an worst-case scenario (Worst Case Scenario), and there is little doubt that prices will jump, following it, beyond $ 100 per barrel – a level last seen in the summer of 2014.
However, as long as masses of Russian soldiers have not crossed the border, and no failure of all talks has been officially announced, it is worth remembering that a diplomatic solution is still on the table; This, on the assumption that Russia is also aware of all the consequences that may be facing it if the battle breaks out.
If a political solution is indeed reached, oil prices may register a sharp and rapid downward fluctuation. Either way, a dramatic and volatile week ahead of us.
The author is a senior energy analyst at Mizrahi Tefahot Bank (TASE :). This review is not a substitute for investment marketing that takes into account the data and special needs of each person.