Ukraine-Russia tensions: Oil surges on supply fears

Ukraine-Russia tensions: Oil surges on supply fears

Image source, Getty Images

Oil and gas prices climbed on Tuesday on fears the Ukraine-Russia crisis will disrupt supplies across the world.

The price of Brent crude oil, an international benchmark, touched a seven-year high of more than $99 (£73) a barrel after President Vladimir Putin ordered troops into Ukraine’s east.

But prices later moderated, despite Western countries responding with economic sanctions and moves to block a key Russian gas pipeline.

Shares also stemmed early losses.

After falling more than 1.5% in early trade on Tuesday, Wall Street turned up following remarks by US President Joe Biden outlining the US response. The Dow closed down 1.4%, however, while the wider S&P 500 slumped 1% and the Nasdaq fell 1.2%.

Earlier, Japan’s Nikkei 225 index closed 1.7% lower, and the Shanghai Composite fell nearly 1%, but share indexes in Europe and the UK ended roughly flat, with the FTSE 100 closing up 0.1%.

“The West at the moment is treading fairly carefully,” said Russ Mould, investment director at the brokers AJ Bell.

Pain at the pump

Russia is the second-largest oil exporter after Saudi Arabia and the world’s top producer of natural gas.

Measures forcing the country to supply less crude or natural gas would have “substantial implications” on oil prices and the global economy, said Sue Trinh of Manulife Investment Management.

The RAC warned the crisis would push up UK petrol prices further, after they hit a record 149.12p a litre on Sunday.

“Russia’s decision to invade Ukraine is already causing oil prices to rise and will undoubtedly send fuel prices inexorably higher towards the grim milestone of £1.50 a litre [of unleaded petrol],” said RAC fuel spokesman Simon Williams.

“This spells bad news for drivers in the UK struggling to afford to put fuel in their cars.”

But the steps announced by the US, UK and Europe so far fall short of what had been threatened in the event of invasion.

The sanctions target financial institutions, elites and other government entities in Russia, in part aiming to restrict the Russian government’s ability to raise money on Western financial markets.

On Tuesday, German Chancellor Olaf Scholz also took the significant step of blocking the certification of the Nord Stream 2 pipeline that would have supplied gas directly from Russia to Germany.

“If Russian goes further with this invasion, we stand prepared to go further,” US President Joe Biden said in remarks at the White House.

He also warned that defending Nato territory could come at a cost to the public in the form of higher energy prices.

Image source, Reuters

Image caption,

A Ukrainian service member in the Donetsk region

Since the start of February, already-rising oil prices have jumped more than 10% amid the tensions.

Maike Currie, an investment director at Fidelity International, said oil could go above $100 a barrel due to a combination of the Ukraine crisis, a cold winter in the US, and a lack of investment in oil and gas supplies around the world.

“Russia accounts for one in every 10 barrels of oil consumed globally, so it is a major player when it comes to the price of oil, and of course, it’s really going to hurt consumers at the petrol pumps,” she said.

Russia’s plan to fight back against new sanctions

Russia has spent years preparing for this moment.

In 2014, when Russian troops moved into Crimea, annexing part of Ukraine, it provoked a first round of international sanctions. And that taught Moscow an important lesson.

Since then it’s been setting up defences, moving away from relying on the dollar, and trying to sanction-proof the Russian economy.

President Putin may be betting that he can withstand sanctions for longer than the West assumes.

Most of the oil and gas that the UK imports does not come from Russia, but it would nonetheless be affected by a rise in global prices.

Average diesel prices in the UK hit 152.51p a litre on Monday, just below Sunday’s record of 152.58p, the RAC said.

UK wholesale gas prices have also jumped, with the UK price for April delivery up 9% and the cost for May up 10% to 191p per therm.

However, that remained lower than the highs seen in December last year, when it peaked at over 400p per therm.

The economic inter-dependence between Russia and Europe is likely to limit Western actions going forward, said Shaistah Akhtar, an expert on sanctions law from the UK law firm Mishcon de Reya. But some of the restraint so far is deliberate, she added.

“They needed to allow some room to manoeuvre,” she said.

Edward Gardner, commodities economist at Capital Economics said the tensions are likely to keep oil prices elevated, even if the West does not take more aggressive action.

“It is not in the economic interests of either Russia or the West to use trade in energy as a weapon against each other, but that is not to say it won’t happen,” he wrote in a note on Tuesday.

“Even if the West does not implement direct sanctions on Russia’s energy exports, tensions with Russia could keep oil prices higher for longer.”

You may also be interested in:

Media caption,

Russian recognition of Ukraine breakaway regions is a “very dark sign”, says UK Prime Minister Boris Johnson

Read More

[an error occurred while processing the directive]