The focus remains firmly fixated on the situation in Ukraine and nothing else matters, it seems, for the markets. Tensions between Russia and the West continue to wreak havoc across financial markets and the energy sector in particular. From their lows last week to their highs this week, prices of both oil contracts have rallied a huge 30% each. This morning saw Brent crude oil nearly hit the $120 per barrel mark, before retreating a huge $5. Talking of volatility! WTI similarly eased sharply after momentarily trading above the 2011 high of $115.00. Investors are just waiting to see if the ongoing talks between Russia and Ukraine will lead to any ceasefire. Putin and Macron are also apparently talking. The uncertainty is weighing on risk appetite, with European stocks unable to catch any momentum to the upside. US index futures held their own slightly better, trading around the flat line at the time of writing.
But all the attention will be on those talks between delegations from Russia and Ukraine, and oil prices. Unless something changes in the Ukraine conflict, it is difficult to see where the pressure will come from, because the OPEC decided against hiking their output more aggressively. The inelasticity of the demand curve for oil means, prices can rise even further before we see any noticeable drop in demand.
The crude oil market was already tight, even before the invasion of Ukraine by Russia. But now there are concerns that because of the ongoing situation, foreign refiners are going to be very reluctant to buy crude oil from Russia, with some banks also refusing to finance shipments of Russian commodities. In effect, this is the same as an actual drop in Russian exports of crude oil. Moscow must find ways to continue selling its oil, otherwise there is the risk of an even bigger oil-price shock.
The unthinkable would be if fresh measures are introduced that would directly target oil and gas exports from Russia, or if the latter retaliates by turning off supplies of these commodities to its western neighbours in Europe. An energy-dependant Europe will want to avoid this situation, nearly at all costs. But traders are not taking any chances as fighting in Ukraine continues, while international payments to and from Russia become increasingly very difficult with the West’s decision to exclude several Russian banks from the SWIFT global financial messaging system.
So, don’t be surprised if oil prices rebound again after easing some $5 off their earlier highs.
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