Oil prices can hit $125 a barrel if Russia-Ukraine crisis worsens: Analysts

The brewing tensions between Russia and Nato over Ukraine have cast a shadow on how key commodities, especially crude oil, have played out over the past few days. Brent oil prices have already crossed the $90 per barrel mark – up 14 per cent in a month. And if the standoff worsens and translates into a war, analysts expect oil prices to hit $125 a barrel – up around 40 per cent from the current levels – as we head deeper into 2022.

 

“War will result in elevated risk-premiums and higher transit costs. On that basis, oil may hit $125 and natural gas $200 in per barrel of oil equivalent (BoE) terms. Assuming all countries halt purchases of Russian energy, the potential price impact would be huge, with oil rising to $175 a barrel and European gas to $250,” wrote Michael Every, global strategist at Rabobank International in a recent note.

Russia is the world’s third-largest producer of oil and the second largest producer of natural gas, with a global market share of 12 per cent and nearly 17 per cent in 2020, respectively, according to the BP Statistical Review of World Energy. In 2020, European OECD nations took in 48 per cent of Russia’s crude and condensate shipments and 72 per cent of its natural gas exports. 

“In a severe scenario, we assume that 10–20 per cent of Russian oil production and exports are disrupted, lifting Brent prices to $125 or higher. Elevated prices temper oil demand, keeping the market from overtightening. The magnitude of the price reaction would depend on when the disruption occurs. OPEC+ still has some spare capacity, so the group could increase production and compensate for the disruption at this time,” wrote analysts at UBS in a recent report.

Though analysts believe diplomatic efforts will continue leading to a stabilisation and an eventual easing of these tensions, it may take several months for this to happen, during which flare-ups remain possible that can negatively impact oil prices.

Meanwhile, US President Joe Biden said earlier this week that he would consider sanctions on President Vladimir Putin if Russia invaded Ukraine. Western countries have already stepped up military preparations and made plans to shield Europe from a possible energy supply shock, reports suggest.

 

“The market impact of US sanctions could bifurcate the globe into complying and non-complying countries. Yet a failure to use sanctions would show US powerlessness to prevent Russia moving on Ukraine. At the current juncture, the markets are significantly mispricing the odds of an impactful war happening over Ukraine, with major volatility implied for energy, grains, fertiliser, metals, rates, and the currency markets," Every wrote.

Analysts at Goldman Sachs, too, had recently forecast oil prices to reach the $100 per barrel mark. The impact of the Omicron variant of Covid, they said, would most likely be felt in the first half of 2022, as governments tighten measures to contain the spread of the new variant.

“Oil demand which briefly touched pre-Covid levels of $100 million barrels per day (mb/d) and will be at record highs for most part of 2022. Except for the demand for jet fuel, the demand has already been at record high for diesel and gasoline. There is a possibility that oil prices may hit $100 per barrel during 2022, but it is more of an outcome for 2022-end. That said, if the supply is constrained, there will need to be demand destruction as well on account of higher oil prices,” said Damien Courvalin, head of energy research at Goldman Sachs.