The impact of the Russian invasion of Ukraine on the International Crude Oil Market
The crude oil price has begun a new cycle on the front foot as heightened demand confidence and tight supplies continue to define the market. Oil prices continued to hover around the $120 milestone on both major benchmarks after Saudi Arabia took advantage of tightening supplies by raising the July official selling price (OSP) for its flagship Arab Light crude to Asia from $2.10 in June to a $6.50 premium over Oman and Dubai quotes. This is just off an all-time-high recorded in May when prices hit highs due to worries of supply disruptions from Russia.
The oil market is extremely tight, and Western sanctions have exacerbated that for those looking to pivot away from Russia. Pricing power is very much with suppliers of crude oil, and they do not expect this move to affect Eastern demand for Russian oil. It could further encourage those that have refused to condemn the Kremlin to ramp up purchases of discounted Russian crude, as we’ve already seen.
The price hike followed last week’s decision by OPEC+ to boost output for July and August by 648,000 barrels per day. This number is 50 percent more than previously planned but remains a modest target amid rebounding pandemic demand, offering modest relief for a global economy suffering from soaring energy prices and the resulting inflation. The extended cartel has also persistently failed to hit raised output targets these years, falling short of April’s targets by a whopping 2.7m barrels per day amid constraints in global refining capacity. That, along with a European Union agreement to end most oil imports from Russia, has pushed prices higher. Gasoline and diesel prices have also been on the rise due to a lack of refining capacity to turn crude into motor fuel. Due to these factors, crude oil markets may face quite a lot of challenges in the coming months.
The main concern is the Chinese demand which can keep the prices high over the next few months. This increases risk in economic recovery of many countries in the world, especially in the importing countries in the Global South. This, along with high global food prices, might be the trigger point that leads the world economy to a recession. Geopolitical tensions high following Russia’s invasion of Ukraine, and continued concerns about supply casting a shadow over oil markets add to the rising concerns.
The airline sector recovery and spurt in demand are closely monitored as summers are approaching, increasing demand for travel to put additional pressure on oil prices. According to the Transportation Security Administration (TSA), air travel numbers are nearing pre-pandemic levels. Compared to a similar period in 2021, the figure has increased by about 300,000. It is also over 1.6 million higher than in 2020 but 244,544 lower than in 2019. In addition to the rise in demand, tight supplies are also behind the surge in crude oil prices.
The EU is set to slap an embargo on Russian oil after leaders agreed on a plan to ban more than two-thirds of imports in an escalation of sanctions over the war in Ukraine. It marks the sixth round of sanctions by the bloc targeting Moscow since their invasion in February, with all 27 member states needing to agree on any measures. European Council President Charles Michel believes the latest move will cut “a huge source of financing” for Russia’s war machine. Before the war, some 18 percent of Britain’s diesel requirements were met by Russia, but the UK has been gradually reducing imports after imposing its restrictions on oil from Russia. Despite being less reliant on Russian oil than many EU countries, Britain is affected by the current uncertainty pushing up prices across interconnected markets. Europe currently takes around two million barrels a day from Russia. The EU imports around 40 percent of its gas and 27 percent of its oil from Russia, so it is likely that petrol prices on the continent are likely to be hit in the short term, while countries find alternative sources.
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