Russia, Ukraine border tension fueling surge in energy markets
Oil prices reached their highest level in 7 years at the end of last week, and observers expect the upward trend to continue this week.
There are growing fears about Russia’s potential invasion of Ukraine, which will impact global crude oil supplies.
Higher crude oil prices would exacerbate already high inflation rates globally, adding pressure on the Federal Reserve to raise interest rates very quickly.
Financial markets are looking forward to this Wednesday when the official minutes of the Federal Reserve’s Open Markets Committee meeting held last January will be published.
They will determine the groundwork to establish as a result of rising interest rates in the future.
What will happen if Russian crude exports are derailed due to tensions with Ukraine?
Russia ranks second in the world in the production of both oil and natural gas. Daily, it produces 10.5 million barrels of crude oil and 761 billion cubic meters of natural gas.
It is also a major supplier of gas to the European market through its extensive pipeline network, with total exports reaching 155 billion cubic meters last year.
As for Ukraine, it is a major center for energy transfer, especially to Europe, and, through it, Russia transports 40 billion cubic meters of gas annually.
Tensions between Russia and Ukraine have more than doubled gas prices in the last six months, and oil prices reached their highest level in seven years.
If Russia invades Ukraine
There are potential consequences of this invasion, most notably the threat by the US and EU to impose sanctions on Russia.
That threat may escalate to the point of resorting to separating Moscow from the rapid international payments system (SWIFT). Meanwhile, Germany has suspended the Nord Stream 2 pipeline from Russia, which officials planned to start service by Q2 this year.
In the gas market, this security deterioration will lead to a rise to record levels in gas and electricity prices in Europe, in addition to recording a deficit in gas supplies there.
As for the oil market, observers expect that a market supply deficit will take place to coincide with the acceleration of demand, potentially disrupting a quarter of Europe’s oil needs from Russia.
There are as well expectations of a significant rise in oil prices.
A few days ago, JPMorgan predicted that oil prices would rise from about $92 today to $120 a barrel. It warned that if Russian oil exports were cut in half, Brent oil prices were likely to race up to $150 a barrel.
History records show that the highest level of oil prices reached $147.50 per barrel in July of the year 2008.
36% of revenues for Russia come from sales of oil and gas
On the other hand, Russia may pay a heavy tax for this tension, as it relies heavily on crude oil revenues for its budget. The following data confirms this:
– According to the Russian Finance Ministry, Russia’s sales of oil and natural gas exceeded the initial forecasts for 2021 as a result of the sharp rise in prices, as they constituted 36 percent of the total budget. These revenues amounted to 9.1 trillion rubles ($119 billion). In October alone, revenue was 1.1 trillion rubles, or nearly $500 million a day.
– According to the Central Bank of Russia, Russia’s total exports amounted to $489.8 billion in 2021. Of this, the value of crude oil amounted to $110.2 billion, the sale of petroleum products reached $68.7 billion, natural gas through pipelines $54.2 billion, and liquefied natural gases $7.6 billion.
Russia ran a historically high current account surplus of $120.3 billion, equivalent to 7% of GDP, last year, driven by rising gas prices.
OPEC is optimistic
At this time, the Organization of Petroleum Exporting Countries (OPEC) expected that global demand for oil will rise sharply this year in light of a strong economic recovery after the Corona epidemic. This is a development that would support prices.
And “OPEC” maintained its forecast for the growth of global demand for oil this year at 4.15 million barrels per day, which means that total demand is likely to reach 100.79 million, exceeding pre-epidemic levels.