Could Oil Hit $100 a Barrel Again?

With the Russian invasion of Ukraine still in full force, drawing international condemnation, many traders may be wondering what this latest development in international affairs means for the Oil (CL) market. The price of Crude Oil as well as that of the international benchmark Brent Oil (EB) were both on the way up on Sunday in response to shifts in the international marketplace, potentially heading back toward triple digits.

Fighting in Ukraine Continues

As of Monday morning, the battles over control of Ukraine are continuing. While the Russian army has made significant incursions from the south, east, and north of the country, so far it seems like the Ukrainian military has succeeded in retaining control of the capital, Kyiv.

While Ukrainian President Volodymyr Zelensky is preparing to send a delegation on his behalf to negotiate with Russia in mutually neighboring country Belarus today, it seems to be doubtful whether the talks will be fruitful. In the meantime, Western democratic nations have coordinated a range of economic sanctions designed to exert pressure on the Russian Federation. 

In addition to closing European airspace to Russian aircraft, the Biden administration and the European Union have taken steps to exclude Russia-based banks from the interbank messaging system known as SWIFT. This move could severely impede the Russian financial sector’s ability to conduct international commerce. In response to these decisions by Western countries, Russian President Vladimir Putin has put his nation’s nuclear forces on ‘red alert’. 

In the midst of this quickly-changing situation, markets around the world, such as those for energy, and, more specifically, Oil, are responding. Some petrol merchants are concerned that the sanctions regime fast taking shape could be expanded to cover Russian energy exports as well. Given that Russia is the world’s third-largest Oil exporter and second-largest exporter of Natural Gas (NG), such a move on the part of the United States and European Union could form massive upward pressure on the costs of these two Commodities. 

Petrol Price Pump

As of Monday morning, Oil was trading at above $96, a 4.4% rise. Brent Oil had fallen a slight 0.8%, but was still nearly 4% above last week’s closing price. Some analysts from Goldman Sachs (GS) are even predicting that the international benchmark could reach above $115 within a month. While it currently seems likely that Western sanctions will exclude energy and food products from their purview, many market watchers say it is too soon to exclude the possibility of such a decision should the military conflict in Ukraine continue to intensify.

An additional factor that could push petrol’s price upward in coming weeks is rising demand across the world as coronavirus infections recede; some commodity market analysts posit that were Russian Oil supplies to be excluded for the market for thirty days, up to four million barrels would have to be sourced from other countries per day in order to keep Oil from rising above $120. Given that OPEC+ nations are set to meet later this week, a production increase could very well be on the table. 

Currently, merchants from across the world are already responding to the prospect of a stricter international sanctions regime. According to some reports, buyers from Asia are already attempting to source a larger proportion of their required fuel from the Arabian peninsula rather than from Russia, potentially betraying the growing apprehension regarding potential supply disruptions as Russian financial institutions struggle to complete international payments. 

Coming Divestment Wave?

Perhaps more dramatically, private businesses may now be feeling pressure from Western governments to cut business ties with Russia. In a decision that put an end to economic activity in the country lasting nearly since the fall of the Soviet Union, oil and gas company British Petroleum (BP-L) announced yesterday that it would be divesting itself of its Russian holdings.

BP currently holds a nearly one-fifth stake in Russian petrol megafirm Rosneft; the decision by the British-based firm to divest, although lauded by U.K. government figures, may end up costing it $25 billion. BP’s chief executive, Bernard Looney, has confirmed that this step was taken due to geopolitical considerations relating to the invasion of Ukraine. Now that the biggest corporate foreign investor in the Russian Federation is pulling out, other Western petrol firms like French firm Total (TTE.PA) could feel obligated to weigh this possibility as well. Given that Russian reserves make up about 50% of BP’s Oil and Natural Gas supplies, this political move could have repercussions for the firm’s bottom line going forward.

As of the time of writing, Oil and Brent Oil have not dropped to last week’s prices. With the crisis in Ukraine seemingly far from resolution, it remains to be seen whether the gloomiest predictions for the continued rise in fossil fuels’ price will be fulfilled, with the resultant deleterious consequences for U.S. inflation as well as the global economy’s post-pandemic recovery as a whole.