Russian President Vladimir Putin announced a partial military mobilization in Russia, sending crude oil prices about 2.5% higher, after several days of relative stability in the market the goods.
GAnd of course this is not the first time that Putin and his war in Ukraine have affected energy prices. In June, about four months after Russia’s invasion of Ukraine, and with the increase in sanctions on Russia and its products, the price of Brent oil (the global benchmark) soared to more than $120 per barrel. As of Wednesday morning, the Brent was trading at a level of $93 per barrel, although a sharp drop from the record, but a price level that is still about 22% higher than last year.
In the last week, before Putin’s speech, oil contracts were traded with great volatility, partly in anticipation of the US Federal Reserve’s interest rate hike. The Fed’s aggressive policy is weighing on the oil markets, and traders fear that the sharp interest rate hikes will lead to an economic slowdown – which in turn will weaken demand.
Dr. Gil Bafman, Bank Leumi’s Chief Economist, points out that besides the weakness of global economic activity and the fear of entering a recession in Europe and the US, the volatility was also due to fears of a decrease in demand from China, against the background of the increase in morbidity there and the “zero corona” policy. “The likelihood of signing a nuclear agreement between the Western powers and Iran has also decreased, due to doubts regarding the latter’s commitment to the new agreement,” Bafman added.
There are also factors that support the price drop
Along with this, there are factors that support the drop in oil prices, such as an increase in the output of Saudi Arabia and the plan of the powers to impose a “ceiling price” on Russian oil, while at the same time the possibility of replenishing the stocks in the emergency reserves of the USA is increasing.
“Saudi Arabia, the largest oil producer in the OPEC group, has announced that it has increased oil production to a little more than 11 million barrels per day,” notes Belaumi. “This is in order to comply with requests from the US and other countries to increase the supply of oil to the market, in order to stabilize it and prevent a further increase in the price.”
Befman estimates that the process of releasing crude oil from the US strategic reserve is planned to be completed by the end of the year, and the US is even planning a renewed increase in stocks in the future. On the other hand, the weakness of economic activity reduces the global demand for oil and may prevent a repeated increase in the price of oil to peak levels. “In our estimation, the price of a barrel of Brent oil will remain around 90-100 dollars for the foreseeable future,” Befman speculates.
And what’s next? Warren Patterson, head of commodities research at ING, quoted by CNBC, says that the escalation will lead to increased uncertainty about Russian energy supplies, and that “the move may lead to calls for more aggressive action against Russia in terms of sanctions from the West.”
On December 5, European Union sanctions will come into force, prohibiting the sea import of Russian crude oil.
“As long as the war continues, prices will remain high”
Chen Herzog, chief economist at BDO, believes that even if there is an unusual action by Russia, which will increase oil prices, over time they are expected to stabilize around the current level. “Oil prices are currently at about $90 per barrel, compared to about $70 a year and a half ago. As long as the war in Ukraine continues, oil prices are expected to remain high, due to the limitations on the supply chains and the limitations and risk involved in exporting from Russia,” he says.
“If we look two or three years ahead, we estimate that oil prices will drop to the level of 75-80 dollars per barrel, which reflects the marginal cost of oil production in the world,” adds Herzog.
“According to past experience, an event of further escalation in Eastern Europe may once again cause oil prices to rise to the $120 region. Oil is a very tradable product, unlike natural gas, and there is the ability to export it in a wide variety of alternatives. Therefore, situations of tension are not completely prevented from Russia either to export oil.
“Even if there is another unusual increase in prices following the escalation of the war, it will most likely only be a temporary increase, provided there is no damage to Russia’s oil fields or oil production capacity, and at the moment it does not seem that we are on the way to that.”
Sergey Vaschunok, a senior analyst at Oppenheimer, also does not think there will be a change in the price. “Russia is already cut off in terms of oil exports to the West, but the US manages to cover the loss of Russian oil, with an increase in production and exports. Its exports recently rose to an all-time high, and OPEC is not reducing production either. In my estimation, prices will continue to fall amid fears of a global economic slowdown.”